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SMITH & WESSON BRANDS, INC. - Quarter Report: 2020 January (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2020

Commission File No. 001-31552

 

American Outdoor Brands Corporation

(Exact name of registrant as specified in its charter)

 

 

Nevada

 

87-0543688

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2100 Roosevelt Avenue

Springfield, Massachusetts

 

01104

(Address of principal executive offices)

 

(Zip Code)

(800) 331-0852

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

Trading Symbol

Name of exchange on which registered

Common Stock, par value $.001 per share

AOBC

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

 

  

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had 55,068,297 shares of common stock, par value $0.001, outstanding as of March 3, 2020.

 

 


AMERICAN OUTDOOR BRANDS CORPORATION

Quarterly Report on Form 10-Q

For the Three and Nine Months Ended January 31, 2020 and 2019

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

 

 

Item 1. Financial Statements (Unaudited)

  

4

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

22

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

33

 

Item 4. Controls and Procedures

  

33

 

 

 

 

PART II - OTHER INFORMATION

  

35

 

Item 1. Legal Proceedings

  

35

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

Item 6. Exhibits

  

35

Signatures

  

37

EX-31.1

  

 

EX-31.2

  

 

EX-31.3

 

 

EX-31.4

 

 

EX-32.1

 

 

EX-32.2

 

 

EX-32.3

  

 

EX-32.4

  

 

 

Smith & Wesson®, S&W®, M&P®, M&P Shield®, Performance Center®, Bodyguard®, Governor®, SW22 Victory®, T/C ®, America’s Master Gunmaker ®, Compass®, Contender®, Dimension®, Encore®, Triumph®, Weather Shield®, Caldwell®, Delta Series®, Wheeler®, Tipton®, Frankford Arsenal®, Lockdown®, BOG-POD®, Golden Rod®, Mag Charger®, Hooyman®, Schrade®, Old Timer®, Uncle Henry®, Imperial®, Non-Typical Wildlife Solutions®, Crimson Trace®, Lasergrips®, Laserguard®, Rail Master®, Shockstop®, Laserlyte®, Key Gear®, U-Dig-It®, Bubba®, Bubba Blade®, One Cut and You’re Through®, Gemtech®, G-Core®, Halo®, Integra®, World Class Silencers®, LiNQ®, Stinky Bubba®, and Turkinator™ are some of the registered U.S. trademarks of our company or one of our subsidiaries. American Outdoor Brands CorporationSM, M2.0™, SDVE™, Thompson/Center Arms™, Impact!™, Strike™, Venture™, Defender Series™, Instinctive Activation™, Master Series™, UST™, Blast Jacket™, One™, The Professional’s Choice for Decades™, and World Class Ammunition™ are some of the unregistered trademarks of our company or one of our subsidiaries. This report also may contain trademarks and trade names of other companies.

 

 

 


Statement Regarding Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this Quarterly Report on Form 10-Q, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding the impact, if any, of recently issued accounting standards on our consolidated financial statements; assessments that we make about determining segments and reporting units; the features of our outstanding debt; estimated amortization expense of intangible assets for future periods; the outcome of the lawsuits to which we are subject and their effect on us; the proposed spin-off, including the timing and purpose thereof and the expected restructuring charges, our belief that inventory levels, both internally and in the distribution channel, in excess of demand, may negatively impact future operating results; our belief that it is difficult to forecast the potential impact of distributor inventories on future revenue and income as demand is impacted by many factors, including seasonality, new product introductions, news events, political events,  and consumer tastes; our assessment of consumer demand and factors that stimulate demand for our products; the effect on our business of various factors, including terrorism and the level of political pressures on firearm laws and regulations; expected inventory levels for future periods; future investments for capital expenditures; future products and product developments; the features, quality, and performance of our products; the success of particular product or marketing programs; our market share and factors that affect our market share; liquidity and anticipated cash needs and availability; the likelihood of reaching the maximum per occurrence self-insurance limit; our expectation that the majority of revenue from the outstanding performance obligations as of January 31, 2020 will be recognized during fiscal 2020; the expectation that the $3.1 million of unrecognized compensation expense related to unvested RSUs and PSUs will be recognized over a weighted average remaining contractual term of 1.3 years; our belief that our percentage increase in sales in handguns likely did not match NICS as a result of a combination of reporting changes in certain states, timing related to new product introductions, and fulfillment of consumer demand out of channel inventory, particularly by several key strategic retailers; our plan to rely on the national logistics facility in Boone County, Missouri for substantially all of our product distribution; the potential exposure to credit and market risks, including, but not limited to, the failure of any counterparty to perform under the terms of the derivative contract or the adverse effect on the value of the financial instrument resulting from a change in interest rates; our belief we are maintaining handgun market share; the increase to our fourth quarter general and administrative expenses because of the separation agreement with our former President and Chief Executive Officer; our belief that our inventory levels will allow us to mitigate some of the impact of the coronavirus to our business in the short term; and our belief that our percentage decrease in sales likely did not match NICS because of a combination of ongoing disruptive pricing pressure in the market for our modern sporting rifles as well as the reasons described above in our comparison of handgun NICS. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by the forward-looking statements. Such factors include, among other, economic, social, political, legislative, and regulatory factors; the potential for increased regulation of firearms and firearms-related products; actions of social activists that could have an adverse effect on our business; the impact of lawsuits; the demand for our products; the state of the U.S. economy in general and the firearm industry in particular; general economic conditions and consumer spending patterns; our competitive environment; the supply, availability, and costs of raw materials and components; speculation surrounding fears of terrorism and crime; our anticipated growth and growth opportunities; our ability to increase demand for our products in various markets, including consumer, law enforcement, and military channels, domestically and internationally; our penetration rates in new and existing markets; our strategies; the completion of our proposed spin-off and the operations and performance of the two separate companies thereafter; our ability to maintain and enhance brand recognition and reputation; risks associated with the establishment of our new 632,000 square foot national logistics facility including the expected benefits; our ability to introduce new products; the success of new products; our ability to expand our markets; our ability to integrate acquired businesses in a successful manner; the general growth of our outdoor products and accessories business; the potential for cancellation of orders from our backlog; and other factors detailed from time to time in our reports filed with the Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended April 30, 2019, filed with the SEC on June 19, 2019.

 

 

 

 


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of:

 

 

 

January 31, 2020

 

 

April 30, 2019

 

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,101

 

 

$

41,015

 

Accounts receivable, net of allowance for doubtful accounts of $2,010 on

   January 31, 2020 and $1,899 on April 30, 2019

 

 

101,822

 

 

 

84,907

 

Inventories

 

 

201,536

 

 

 

163,770

 

Prepaid expenses and other current assets

 

 

9,575

 

 

 

6,528

 

Income tax receivable

 

 

4,749

 

 

 

2,464

 

Total current assets

 

 

363,783

 

 

 

298,684

 

Property, plant, and equipment, net

 

 

164,341

 

 

 

183,268

 

Intangibles, net

 

 

78,346

 

 

 

91,840

 

Goodwill

 

 

182,267

 

 

 

182,269

 

Other assets

 

 

19,410

 

 

 

10,728

 

 

 

$

808,147

 

 

$

766,789

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

31,843

 

 

$

35,584

 

Accrued expenses and deferred revenue

 

 

43,131

 

 

 

39,322

 

Accrued payroll and incentives

 

 

14,189

 

 

 

21,473

 

Accrued income taxes

 

 

265

 

 

 

175

 

Accrued profit sharing

 

 

1,699

 

 

 

2,830

 

Accrued warranty

 

 

4,208

 

 

 

5,599

 

Current portion of notes and loans payable

 

 

 

 

 

6,300

 

Total current liabilities

 

 

95,335

 

 

 

111,283

 

Deferred income taxes

 

 

9,595

 

 

 

9,776

 

Notes and loans payable, net of current portion

 

 

199,034

 

 

 

149,434

 

Finance lease payable, net of current portion

 

 

40,202

 

 

 

45,400

 

Other non-current liabilities

 

 

13,482

 

 

 

6,452

 

Total liabilities

 

 

357,648

 

 

 

322,345

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares

   issued or outstanding

 

 

 

 

 

 

Common stock, $.001 par value, 100,000,000 shares authorized, 73,234,996 issued

   and 55,068,134 shares outstanding on January 31, 2020 and 72,863,624 shares

   issued and 54,696,762 shares outstanding on April 30, 2019

 

 

73

 

 

 

73

 

Additional paid-in capital

 

 

264,866

 

 

 

263,180

 

Retained earnings

 

 

407,862

 

 

 

402,946

 

Accumulated other comprehensive income

 

 

73

 

 

 

620

 

Treasury stock, at cost (18,166,862 shares on January 31, 2020 and

   April 30, 2019)

 

 

(222,375

)

 

 

(222,375

)

Total stockholders’ equity

 

 

450,499

 

 

 

444,444

 

 

 

$

808,147

 

 

$

766,789

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS) AND COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

 

 

 

For the Three Months Ended January 31,

 

 

For the Nine Months Ended January 31,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands, except per share data)

 

Net sales

 

$

166,695

 

 

$

162,008

 

 

$

444,753

 

 

$

462,544

 

Cost of sales

 

 

111,492

 

 

 

107,949

 

 

 

291,390

 

 

 

299,677

 

Gross profit

 

 

55,203

 

 

 

54,059

 

 

 

153,363

 

 

 

162,867

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,192

 

 

 

3,297

 

 

 

9,410

 

 

 

9,358

 

Selling, marketing, and distribution

 

 

19,294

 

 

 

15,373

 

 

 

55,419

 

 

 

42,279

 

General and administrative

 

 

21,810

 

 

 

27,026

 

 

 

71,601

 

 

 

78,065

 

Goodwill impairment

 

 

 

 

 

10,396

 

 

 

 

 

 

10,396

 

Total operating expenses

 

 

44,296

 

 

 

56,092

 

 

 

136,430

 

 

 

140,098

 

Operating income/(loss)

 

 

10,907

 

 

 

(2,033

)

 

 

16,933

 

 

 

22,769

 

Other (expense)/income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

 

(18

)

 

 

47

 

 

 

73

 

 

 

38

 

Interest expense, net

 

 

(2,885

)

 

 

(2,548

)

 

 

(8,551

)

 

 

(6,822

)

Total other (expense)/income, net

 

 

(2,903

)

 

 

(2,501

)

 

 

(8,478

)

 

 

(6,784

)

Income from operations before income taxes

 

 

8,004

 

 

 

(4,534

)

 

 

8,455

 

 

 

15,985

 

Income tax expense

 

 

2,273

 

 

 

1,191

 

 

 

3,539

 

 

 

7,399

 

Net income/(loss)

 

 

5,731

 

 

 

(5,725

)

 

 

4,916

 

 

 

8,586

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on interest rate swap

 

 

(92

)

 

 

(834

)

 

 

(710

)

 

 

(991

)

Other comprehensive loss, before income taxes

 

 

(92

)

 

 

(834

)

 

 

(710

)

 

 

(991

)

Income tax benefit on other comprehensive loss

 

 

26

 

 

 

217

 

 

 

163

 

 

 

257

 

Other comprehensive loss, net of tax

 

 

(66

)

 

 

(617

)

 

 

(547

)

 

 

(734

)

Comprehensive income/(loss):

 

$

5,665

 

 

$

(6,342

)

 

$

4,369

 

 

$

7,852

 

Net income/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

 

$

(0.10

)

 

$

0.09

 

 

$

0.16

 

Diluted

 

$

0.10

 

 

$

(0.10

)

 

$

0.09

 

 

$

0.16

 

Weighted average number of common shares

   outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

55,064

 

 

 

54,544

 

 

 

54,919

 

 

 

54,444

 

Diluted

 

 

55,744

 

 

 

54,544

 

 

 

55,641

 

 

 

55,132

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income/(Loss)

 

 

Shares

 

 

Amount

 

 

Equity

 

Balance at October 31, 2018

 

 

72,706

 

 

$

73

 

 

$

258,126

 

 

$

398,846

 

 

$

1,572

 

 

 

18,167

 

 

$

(222,375

)

 

$

436,242

 

Proceeds from exercise of employee stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

2,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,118

 

Shares issued under employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on interest rate swap,

   net of tax effect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(617

)

 

 

 

 

 

 

 

 

(617

)

Issuance of common stock under restricted stock

   unit awards, net of shares surrendered

 

 

9

 

 

 

 

 

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

Other (rounding)

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Net loss

 

 

 

 

 

 

 

 

 

 

(5,725

)

 

 

 

 

 

 

 

 

 

 

 

(5,725

)

Balance at January 31, 2019

 

 

72,715

 

 

 

73

 

 

 

260,212

 

 

 

393,122

 

 

 

955

 

 

 

18,167

 

 

 

(222,375

)

 

 

431,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2018

 

 

72,434

 

 

 

72

 

 

 

253,616

 

 

 

389,146

 

 

 

1,689

 

 

 

18,167

 

 

 

(222,375

)

 

 

422,148

 

Proceeds from exercise of employee stock options

 

 

33

 

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

215

 

Stock-based compensation

 

 

 

 

 

 

 

 

6,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,070

 

Shares issued under employee stock purchase plan

 

 

108

 

 

 

 

 

 

943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

943

 

Change in unrealized loss on interest rate swap,

   net of tax effect

 

 

 

 

 

 

 

 

 

 

 

(734

)

 

 

 

 

 

 

 

 

(734

)

Impact of adoption of accounting standard updates

 

 

 

 

 

 

 

 

(4,610

)

 

 

 

 

 

 

 

 

 

 

 

(4,610

)

Issuance of common stock under restricted stock

   unit awards, net of shares surrendered

 

 

140

 

 

 

1

 

 

 

(632

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(631

)

Net income

 

 

 

 

 

 

 

 

 

 

8,586

 

 

 

 

 

 

 

 

 

 

 

 

8,586

 

Balance at January 31, 2019

 

 

72,715

 

 

 

73

 

 

 

260,212

 

 

 

393,122

 

 

 

955

 

 

 

18,167

 

 

 

(222,375

)

 

 

431,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at October 31, 2019

 

 

73,226

 

 

 

73

 

 

 

266,582

 

 

 

402,131

 

 

 

139

 

 

 

18,167

 

 

 

(222,375

)

 

 

446,550

 

Proceeds from exercise of employee stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

(1,672

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,672

)

Shares issued under employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on interest rate swap,

   net of tax effect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66

)

 

 

 

 

 

 

 

 

(66

)

Issuance of common stock under restricted stock

   unit awards, net of shares surrendered

 

 

9

 

 

 

 

 

 

(44

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44

)

Net income

 

 

 

 

 

 

 

 

 

 

5,731

 

 

 

 

 

 

 

 

 

 

 

 

5,731

 

Balance at January 31, 2020

 

 

73,235

 

 

 

73

 

 

 

264,866

 

 

 

407,862

 

 

 

73

 

 

 

18,167

 

 

 

(222,375

)

 

 

450,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2019

 

 

72,864

 

 

 

73

 

 

 

263,180

 

 

 

402,946

 

 

 

620

 

 

 

18,167

 

 

 

(222,375

)

 

 

444,444

 

Proceeds from exercise of employee stock options

 

 

15

 

 

 

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,344

 

Shares issued under employee stock purchase plan

 

 

173

 

 

 

 

 

 

862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

862

 

Change in unrealized loss on interest rate swap,

   net of tax effect

 

 

 

 

 

 

 

 

 

 

 

(547

)

 

 

 

 

 

 

(547

)

Issuance of common stock under restricted stock

   unit awards, net of shares surrendered

 

 

183

 

 

 

 

 

 

(594

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(594

)

Net income

 

 

 

 

 

 

 

 

 

 

4,916

 

 

 

 

 

 

 

 

 

 

 

 

4,916

 

Balance at January 31, 2020

 

 

73,235

 

 

$

73

 

 

$

264,866

 

 

$

407,862

 

 

$

73

 

 

 

18,167

 

 

$

(222,375

)

 

$

450,499

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Nine Months Ended January 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

4,916

 

 

$

8,586

 

Adjustments to reconcile net income to net cash (used in)/provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

41,083

 

 

 

39,624

 

Loss/(gain) on sale/disposition of assets

 

 

780

 

 

 

(1,033

)

Provision for losses on notes and accounts receivable

 

 

551

 

 

 

832

 

Goodwill impairment

 

 

 

 

 

10,396

 

Deferred income taxes

 

 

(18

)

 

 

(1,519

)

Change in fair value of contingent consideration

 

 

100

 

 

 

(60

)

Stock-based compensation expense

 

 

1,344

 

 

 

6,070

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(17,466

)

 

 

(19,347

)

Inventories

 

 

(37,766

)

 

 

(20,186

)

Prepaid expenses and other current assets

 

 

(3,047

)

 

 

(591

)

Income taxes

 

 

(2,195

)

 

 

1,146

 

Accounts payable

 

 

(3,610

)

 

 

664

 

Accrued payroll and incentives

 

 

(7,284

)

 

 

5,815

 

Accrued profit sharing

 

 

(1,131

)

 

 

297

 

Accrued expenses and deferred revenue

 

 

529

 

 

 

(8,532

)

Accrued warranty

 

 

(1,391

)

 

 

(1,550

)

Other assets

 

 

2,429

 

 

 

10

 

Other non-current liabilities

 

 

(2,865

)

 

 

123

 

Net cash (used in)/provided by operating activities

 

 

(25,041

)

 

 

20,745

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

 

 

 

(1,791

)

Payments to acquire patents and software

 

 

(551

)

 

 

(355

)

Proceeds from sale of property and equipment

 

 

 

 

 

1,223

 

Payments to acquire property and equipment

 

 

(11,751

)

 

 

(25,989

)

Net cash used in investing activities

 

 

(12,302

)

 

 

(26,912

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from loans and notes payable

 

 

228,225

 

 

 

50,000

 

Cash paid for debt issuance costs

 

 

(875

)

 

 

 

Payments on finance lease obligation

 

 

(663

)

 

 

(1,025

)

Payments on notes and loans payable

 

 

(184,600

)

 

 

(54,725

)

Proceeds from exercise of options to acquire common stock, including employee

   stock purchase plan

 

 

936

 

 

 

1,158

 

Payment of employee withholding tax related to restricted stock units

 

 

(594

)

 

 

(631

)

Net cash provided by/(used in) financing activities

 

 

42,429

 

 

 

(5,223

)

Net increase/(decrease) in cash and cash equivalents

 

 

5,086

 

 

 

(11,390

)

Cash and cash equivalents, beginning of period

 

 

41,015

 

 

 

48,860

 

Cash and cash equivalents, end of period

 

$

46,101

 

 

$

37,470

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

8,422

 

 

$

5,554

 

Income taxes

 

$

5,755

 

 

$

6,885

 

 

7


AMERICAN OUTDOOR BRANDS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

 

Supplemental Disclosure of Non-cash Investing and Financing Activities:

 

 

 

For the Nine Months Ended January 31,

 

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Purchases of property and equipment included in accounts payable

 

$

436

 

 

$

1,606

 

Purchases of property and equipment funded by capital lease

 

 

 

 

24,271

 

Capital lease obligation

 

 

 

 

24,271

 

Changes in other assets for operating lease obligations

 

 

11,821

 

 

 

Change in property and equipment for adoption of ASU 2016-02

 

 

3,276

 

 

 

Changes in finance lease liabilities for the adoption of ASU 2016-02

 

 

(4,245

)

 

 

Changes in lease liabilities for operating lease obligations

 

 

12,790

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

8


 

(1) Organization:

We are a leading manufacturer, designer, and provider of consumer products for the shooting, hunting, and rugged outdoor enthusiast. We are one of the largest manufacturers of handguns, modern sporting rifles, and handcuffs in the United States and an active participant in the hunting rifle and suppressor markets. We are also a leading provider of shooting, hunting, and rugged outdoor products and accessories, including knives and cutting tools, sighting lasers, shooting supplies, tree saws, and survival gear.

In our Firearms segment, we manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our firearm products under the Smith & Wesson, M&P, Performance Center, Thompson/Center Arms, and Gemtech brands. We manufacture our firearm products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We also sell our manufacturing services to other businesses to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands.

In our Outdoor Products & Accessories segment, we design, source, distribute, and manufacture reloading, gunsmithing, and gun cleaning supplies; high-quality stainless steel cutting tools and accessories; flashlights; tree saws and related trimming accessories; shooting supplies, rests, and other related accessories; fishing accessories; apparel; vault accessories; laser grips and laser sights; and a full range of products for survival and emergency preparedness. We sell our products under the Caldwell, Crimson Trace, Wheeler, Tipton, Frankford Arsenal, Schrade, Imperial, Uncle Henry, BUBBA, UST, Lockdown, Hooyman, BOG, Old Timer, LaserLyte, and KeyGear brands. We also offer firearms and non-firearms accessories, such as flashlights and knives, under our brands in our firearms business, including Smith & Wesson, M&P, Performance Center, and Thompson/Center Arms. We develop and market our outdoor products and accessories at our facilities in Columbia, Missouri and Wilsonville, Oregon.

 

On November 12, 2019, our Board of Directors approved proceeding with a plan to spin-off our outdoor products and accessories business as a tax-free stock dividend to our stockholders. Pending final approval of our Board of Directors, customary regulatory approvals, and tax and legal considerations, the spin-off is expected to be completed in the second half of calendar 2020 and would create two independent publicly traded companies: Smith & Wesson Brands, Inc. (which would encompass our firearm business) and American Outdoor Brands, Inc. (which would encompass our outdoor products and accessories business).

The purpose of the spin-off is to enable the management team of each company to focus on its specific strategies, including (1) structuring its business to take advantage of growth opportunities in its specific markets; (2) tailoring its business operation and financial model to its specific long-term strategies; and (3) aligning its external financial resources, such as stock, access to markets, credit, and insurance factors, with its particular type of business. In connection with the proposed spin-off, we expect to incur restructuring charges of approximately $9.0 million to $12.0 million relating to legal, regulatory, and financial services, reorganization and restructuring costs, and start-up costs for the new company beginning in our second quarter of fiscal 2020 and concluding in the second half of calendar 2020. For the nine months ended January 31, 2020, we have recorded approximately $1.2 million of costs associated with the spin-off, which was recorded to general and administrative expenses in the condensed consolidated statements of income/(loss).

(2) Basis of Presentation:

Interim Financial Information – The condensed consolidated balance sheet as of January 31, 2020, the condensed consolidated statements of income/(loss) and comprehensive income/(loss) for the three and nine months ended January 31, 2020 and 2019, the condensed consolidated statement of changes in stockholders’ equity for the nine months ended January 31, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended January 31, 2020 and 2019 have been prepared by us without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at January 31, 2020 and for the periods presented, have been included. All intercompany transactions have been eliminated in consolidation. The consolidated balance sheet as of April 30, 2019 has been derived from our audited consolidated financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019. The results of operations for the nine months ended January 31, 2020 may not be indicative of the results that may be expected for the year ending April 30, 2020, or any other period.

9


 

Revenue Recognition - We recognize revenue in accordance with the provisions of Accounting Standards Update, or ASU, Revenue from Contracts with Customers (Topic 606), which became effective for us on May 1, 2018. Generally, all performance obligations are satisfied and revenue is recognized when the risks and rewards of ownership have transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance.

In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs that entitle customers to receive free goods based upon their purchase of our products. The fulfillment of these free goods is our responsibility. In such instances, we allocate the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the products included in the promotional program, including the free goods. We recognize revenue proportionally as each performance obligation is satisfied, based on the relative transaction price of each product. The net change in contract liabilities for a given period is reported as an increase or decrease to sales.

Our product sales are generally sold free on board, or FOB, shipping point and provide payment terms to most commercial customers ranging from 20 to 90 days of product shipment with a discount available in certain cases for early payment. For contracts with discounted terms, we determine the transaction price upon establishment of the contract that contains the final terms of the sale, including the description, quantity, and price of each product purchased. We estimate variable consideration relative to the amount of cash discounts to which customers are likely to be entitled. In some instances, we provide longer payment terms, particularly as it relates to our hunting dating programs, which represent payment terms due in the fall for certain orders of hunting products received in the spring and summer. We do not consider these extended terms to be a significant financing component of the contract because the payment terms are less than one year. In all cases, we consider our costs related to shipping and handling to be a cost of fulfilling the contract with the customer.

Insurance Reserves — In January 2020, we formed a wholly owned captive insurance company, SW Insurance Company, which provides product liability insurance to us and our subsidiaries. This captive insurance company was recorded in our condensed consolidated financial statements for the three and nine months ended January 31, 2020. We are self-insured through retentions or deductibles for the majority of our workers’ compensation, automobile, general liability, product liability, and group health insurance programs. Self-insurance amounts vary up to $10.0 million per occurrence; however, we believe the likelihood of reaching the maximum per occurrence limit is remote. We record our liability for estimated premiums and incurred losses in the accompanying consolidated financial statements on an undiscounted basis.

Recently Issued Accounting Standards – In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, Leases (Topic 842), or ASU 2016-02, which amends the existing guidance to require lessees to recognize right-of-use assets and lease liabilities in a classified balance sheet. The most prominent among the changes in the standard is the requirement for lessees to recognize right-of-use assets and lease liabilities for those leases classified as operating leases under current GAAP. The requirements of ASU 2016-02 are effective for financial statements for annual periods beginning after December 15, 2018, and early adoption is permitted. We utilized leasing software to assist us in the accounting and tracking of leases and used the optional transitional method allowed by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, we applied the standard using the modified retrospective method with an adoption date of May 1, 2019. We elected to use the package of practical expedients, which permits us to not reassess certain lease contract provisions. We adopted ASU 2016-02 effective May 1, 2019 and recognized right-of-use assets of $11.5 million and lease liabilities of $12.8 million. The difference between the right-of-use assets and the lease liabilities of $1.3 million is a result of the reclassification of deferred rent and lease incentive liabilities primarily relating to our real estate operating leases into the right-of use assets, which had no impact to retained earnings. See also Note 3 — Leases, for more information.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The requirements of this ASU are effective for financial statements for annual periods beginning after December 15, 2019, and early adoption is permitted. While we are currently evaluating the impact this standard will have on our consolidated financial statements, we do not expect the impact to be material.

10


 

(3) Leases:

We lease certain of our real estate, machinery, photocopiers, and vehicles under non-cancelable operating lease agreements.

We recognize expenses under our operating lease assets and liabilities at the commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit interest rate. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, we recognize expense on a straight-line basis over the lease term. Tenant improvement allowances are recorded as an offsetting adjustment included in our calculation of the respective right-of-use asset.

Many of our leases include renewal options that can extend the lease term. The execution of those renewal options is at our sole discretion and are reflected in the lease term when they are reasonably certain to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term.

The amounts of assets and liabilities related to our operating and financing leases as of January 31, 2020 were as follows (in thousands):

 

 

 

Balance Sheet Caption

 

January 31, 2020

 

Operating Leases

 

 

 

 

 

 

Right-of-use assets

 

 

 

$

11,782

 

Accumulated amortization

 

 

 

 

(1,982

)

Right-of-use assets, net

 

Other assets

 

$

9,800

 

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

$

2,731

 

Non-current liabilities

 

Other non-current liabilities

 

 

8,158

 

Total operating lease liabilities

 

 

 

$

10,889

 

Finance Leases

 

 

 

 

 

 

Right-of-use assets

 

 

 

$

40,986

 

Accumulated depreciation

 

 

 

 

(1,590

)

Right-of-use assets, net

 

Property, plant, and equipment, net

 

$

39,396

 

 

 

 

 

 

 

 

Current liabilities

 

Accrued expenses and deferred revenue

 

 

971

 

Non-current liabilities

 

Finance lease payable, net of current portion

 

 

40,202

 

Total finance lease liabilities

 

 

 

$

41,173

 

 

During the three months ended January 31, 2019, we recorded $1.1 million of operating lease costs, of which $293,000 relates to short-term leases, and not recorded as right-of-use assets. We recorded $526,000 of financing lease amortization, and $515,000 was financing lease interest expense during the three months ended January 31, 2020. During the nine months ended January 31, 2020, we recorded $2.8 million of operating lease costs, of which $772,000 relates to short-term leases, and not recorded as right-of-use assets. We recorded $1.6 million of financing lease amortization, and $1.6 million of financing lease interest expense during the nine months ended January 31, 2020. As of January 31, 2020, our weighted average lease term and weighted average discount rate for our operating leases was 4.2 years and 4.4%, respectively. As of January 31, 2020, our weighted average lease term and weighted average discount rate for our financing leases was 18.7 years and 5.0%, respectively, and consisted primarily of our national logistics facility located in Columbia, Missouri. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease.

11


 

Future lease payments for all our operating and finance leases for succeeding fiscal years is as follows (in thousands):

 

 

 

 

 

Operating

 

 

Financing

 

 

Total

 

2020

 

 

 

$

864

 

 

$

748

 

 

$

1,612

 

2021

 

 

 

 

3,125

 

 

 

3,016

 

 

 

6,141

 

2022

 

 

 

 

2,920

 

 

 

3,056

 

 

 

5,976

 

2023

 

 

 

 

2,769

 

 

 

3,071

 

 

 

5,840

 

2024

 

 

 

 

1,722

 

 

 

3,125

 

 

 

4,847

 

2025

 

 

 

 

330

 

 

 

3,180

 

 

 

3,510

 

Thereafter

 

 

 

 

679

 

 

 

48,853

 

 

 

49,532

 

Total future lease payments

 

 

 

 

12,409

 

 

 

65,049

 

 

 

77,458

 

Less amounts representing interest

 

 

 

 

(1,520

)

 

 

(23,876

)

 

 

(25,396

)

Present value of lease payments

 

 

 

 

10,889

 

 

 

41,173

 

 

 

52,062

 

Less current maturities of lease liabilities

 

 

 

 

(2,731

)

 

 

(971

)

 

 

(3,702

)

Long-term maturities of lease liabilities

 

 

 

$

8,158

 

 

$

40,202

 

 

$

48,360

 

 

During the three and nine months ended January 31, 2020, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $1.5 million and $4.3 million, respectively.

(4) Revenue Recognition and Contracts with Customers:

On May 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, using the modified retrospective approach, and recorded a contract liability, included in accrued expenses in the condensed consolidated balance sheet, for outstanding performance obligations related to sales promotions. When evaluating our performance obligations, we disaggregate revenue based on major product lines, which correlate with our reportable segments disclosed in Note 12 — Segment Reporting. Also, domestic sales account for approximately 95% of our total net sales. There are no significant judgments or estimates used in the determination of performance obligations, and the transaction price for the performance obligations are allocated on a pro-rata basis. There are no other contract costs that need to be considered based on the nature of our performance obligations.

The following table outlines the impact of the adoption of ASU 2014-09 on revenue recognized during the nine-month periods ended January 31, 2020 and 2019 (in thousands):

 

 

 

2020

 

 

2019

 

Outstanding performance obligations at beginning of period

 

$

12,213

 

 

$

23,305

 

Revenue recognized

 

 

(14,571

)

 

 

(13,998

)

Revenue deferred

 

 

5,472

 

 

 

4,314

 

Outstanding performance obligations at July 31

 

 

3,114

 

 

 

13,621

 

Revenue recognized

 

 

(7,716

)

 

 

(12,337

)

Revenue deferred

 

 

10,104

 

 

 

7,667

 

Outstanding performance obligations as of October 31

 

 

5,502

 

 

 

8,951

 

Revenue recognized

 

 

(9,492

)

 

 

(10,229

)

Revenue deferred

 

 

11,093

 

 

 

9,064

 

Outstanding performance obligations as of January 31

 

$

7,103

 

 

$

7,786

 

 

During the nine months ended January 31, 2020, we recognized $31.8 million of deferred revenue, of which $10.5 million was previously deferred as of April 30, 2019, as the performance obligations relating to sales promotions were satisfied. This recognition of revenue was partially offset by $26.7 million of additional deferred revenue for outstanding performance obligations relating to sales promotions that have not been satisfied, which was recorded to accrued expenses and deferred revenue in the condensed consolidated balance sheet. This resulted in a $5.1 million net increase in revenue recognized during the nine months ended January 31, 2020. We estimate that the majority of revenue from the outstanding performance obligations as of January 31, 2020 will be recognized during fiscal 2020.

During the nine months ended January 31, 2019, we recognized $36.6 million, of which $22.6 million was previously deferred as of May 1, 2018, the date we adopted ASU 2014-09, as the performance obligations relating to sales promotions were satisfied. This recognition of revenue was partially offset by $21.0 million of additional deferred revenue for outstanding performance obligations relating to sales promotions that have not been satisfied, which was recorded to accrued expenses and deferred revenue in the condensed consolidated balance sheet. This resulted in a $15.5 million net increase in revenue during the nine months ended January 31, 2019.

12


 

(5) Goodwill and Intangible Assets:

The changes in the carrying amount of goodwill for the three and nine months ended January 31, 2020 by reporting segment were as follows:

 

 

 

 

 

 

 

Outdoor

Products &

 

 

 

 

 

 

 

Firearms

Segment

 

 

Accessories

Segment

 

 

Total

Goodwill

 

Balance as of April 30, 2019

 

$

19,024

 

 

$

163,245

 

 

$

182,269

 

Adjustments

 

 

 

 

 

(2

)

 

 

(2

)

Balance as of July 31, 2019

 

 

19,024

 

 

 

163,243

 

 

 

182,267

 

Adjustments

 

 

 

 

 

 

 

 

 

Balance as of October 31, 2019

 

 

19,024

 

 

 

163,243

 

 

 

182,267

 

Adjustments

 

 

 

 

 

 

 

 

 

Balance as of January 31, 2020

 

$

19,024

 

 

$

163,243

 

 

$

182,267

 

 

See Note 12 — Segment Reporting for more detail on segment financial information.  

The following table presents a summary of intangible assets as of January 31, 2020 and April 30, 2019 (in thousands):

 

 

 

January 31, 2020

 

 

April 30, 2019

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer relationships

 

$

92,560

 

 

$

(50,325

)

 

$

42,235

 

 

$

92,560

 

 

$

(41,643

)

 

$

50,917

 

Developed technology

 

 

21,788

 

 

 

(11,968

)

 

 

9,820

 

 

 

21,230

 

 

 

(10,428

)

 

 

10,802

 

Patents, trademarks, and trade names

 

 

57,775

 

 

 

(32,859

)

 

 

24,916

 

 

 

57,477

 

 

 

(28,479

)

 

 

28,998

 

Backlog

 

 

1,150

 

 

 

(1,150

)

 

 

 

 

 

1,150

 

 

 

(1,150

)

 

 

 

 

 

 

173,273

 

 

 

(96,302

)

 

 

76,971

 

 

 

172,417

 

 

 

(81,700

)

 

 

90,717

 

Patents in progress

 

 

1,045

 

 

 

 

 

 

1,045

 

 

 

897

 

 

 

 

 

 

897

 

Total definite-lived intangible assets

 

 

174,318

 

 

 

(96,302

)

 

 

78,016

 

 

 

173,314

 

 

 

(81,700

)

 

 

91,614

 

Indefinite-lived intangible assets

 

 

330

 

 

 

 

 

 

330

 

 

 

226

 

 

 

 

 

 

226

 

Total intangible assets

 

$

174,648

 

 

$

(96,302

)

 

$

78,346

 

 

$

173,540

 

 

$

(81,700

)

 

$

91,840

 

 

We amortize intangible assets with determinable lives over a weighted-average period of approximately five years. The weighted-average periods of amortization by intangible asset class is approximately five years for customer relationships, six years for developed technology, and five years for patents, trademarks, and trade names. Amortization expense, excluding amortization of deferred financing costs, amounted to $4.8 million and $5.5 million for the three months ended January 31, 2020 and 2019, respectively. Amortization expense, excluding amortization of deferred financing costs, amounted to $14.4 million and $16.5 million for the nine months ended January 31, 2020 and 2019, respectively.

Estimated amortization expense of intangible assets for the remainder of fiscal 2020 and succeeding fiscal years is as follows (in thousands):

 

Fiscal

 

Amount

 

2020

 

$

4,857

 

2021

 

 

16,795

 

2022

 

 

14,410

 

2023

 

 

11,855

 

2024

 

 

10,107

 

Thereafter

 

 

18,947

 

Total

 

$

76,971

 

 

13


 

(6) Notes, Loans Payable, and Financing Arrangements:

Credit Facilities – On June 15, 2015, we and certain of our domestic subsidiaries entered into an unsecured credit facility, or the Credit Agreement, with TD Bank, N.A. and other lenders, or the Lenders, which included a $175.0 million revolving line of credit, or the Revolving Line, and a $105.0 million term loan, or the Term Loan. The Term Loan was paid in full on November 19, 2019 with proceeds from the Revolving Line. The Revolving Line provides for availability for general corporate purposes, with borrowings to bear interest at a variable rate equal to LIBOR or prime plus an applicable margin based on our consolidated leverage ratio, at our election. On October 27, 2016, we entered into a second amendment to our Credit Agreement, or the Second Amendment, which, among other things, increased the Revolving Line to $350.0 million, increased the option to expand the credit commitment to an additional $150.0 million, and extended the maturity of the Revolving Line from June 15, 2020 to October 27, 2021. On November 22, 2019, we entered into a fifth amendment to our Credit Agreement, or the Fifth Amendment, which, among other things, provides the Lenders’ consent to the spin-off of our outdoor products and accessories business, provided that certain financial conditions are satisfied, including (x) granting the Lenders security interest in the assets of the remaining business, (y) reducing the Revolving Line to $250.0 million at the time of the spin-off, and (z) reducing the option to expand the credit agreement to $50.0 million at the time of the spin-off. Other than the changes described in the Second and Fifth Amendments, we otherwise remain subject to the terms of the Credit Agreement, as described below.

As of January 31, 2020, we had $200.0 million of borrowings outstanding on the Revolving Line, which bore interest at 3.92%, which is equal to the LIBOR rate plus an applicable margin.

We were required to obtain interest rate protection on the Term Loan covering not less than 75% of the aggregate outstanding principal balance of the Term Loan. Accordingly, on June 18, 2015, we entered into an interest rate swap agreement that covered 100% of the $105.0 million of floating rate debt. On July 6, 2015, we executed an interest rate swap pursuant to such agreement, which required us to pay interest at a defined rate of 1.56% while receiving interest at a defined variable rate equal to the one-month LIBOR rate. This swap, when combined with the applicable margin based on our consolidated leverage ratio, effectively fixed our interest rate on the Term Loan, which was subject to change based on changes in our consolidated leverage ratio. In accordance with the repayment of the Term Loan on November 19, 2019, the interest rate swap was terminated resulting in a realized gain of approximately $40,000.

2020 Senior Notes – On February 28, 2018, we issued an aggregate of $75.0 million of the 2020 Senior Notes to various institutional investors pursuant to the terms and conditions of an indenture, or the 2020 Senior Notes Indenture, and purchase agreements. The 2020 Senior Notes bore interest at a rate of 5.000% per annum payable on February 28 and August 28 of each year, beginning on August 28, 2018. We incurred $158,000 of debt issuance costs related to the issuance of the 2020 Senior Notes. On January 6, 2020, or the Redemption Date, we redeemed 100% of the principal amount of the 2020 Senior Notes, plus accrued and unpaid interest to, but not including, the Redemption Date, with proceeds from the Revolving Line. As part of the redemption, we wrote off $42,000 of debt issuance costs related to the 2020 Senior Notes.

The Credit Agreement for our credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage.

Letters of Credit – At January 31, 2020, we had outstanding letters of credit aggregating $2.5 million, which included a $1.5 million letter of credit to collateralize our newly created captive insurance company.

(7) Fair Value Measurement:

We follow the provisions of ASC 820-10, Fair Value Measurements and Disclosures Topic, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

Financial assets and liabilities recorded on the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).

14


 

Our cash and cash equivalents, which are measured at fair value on a recurring basis, totaled $46.1 million and $41.0 million as of January 31, 2020 and April 30, 2019, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets.

Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

 

quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds which trade infrequently);

 

inputs other than quoted prices that are observable for substantially the full term of the asset or liability (such as interest rate and currency swaps); and

 

inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives).

Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability.

The acquisition-related contingent consideration liability represents the estimated fair value of additional future earn-outs payable for acquisitions of businesses that included earn-out clauses. The valuation of the contingent consideration will be evaluated on an ongoing basis and is based on management estimates and entity-specific assumptions, which are considered Level 3 inputs.

In connection with the Gemtech acquisition, up to a maximum of $17.1 million may be paid contingent upon the cumulative three-year sales volume of Gemtech products. The valuation of this contingent consideration liability was established in accordance with ASC 805 — Business Combinations. During the nine months ended January 31, 2020, we reduced the remaining fair value of this contingent liability by $100,000 to zero because we confirmed the performance metrics were not achieved. This reduction was recorded in other income on the condensed consolidated statements of income/(loss).

(8) Inventories:

The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or net realizable value, as of January 31, 2020 and April 30, 2019 (in thousands):

 

 

 

January 31, 2020

 

 

April 30, 2019

 

Finished goods (a)

 

$

142,449

 

 

$

108,247

 

Finished parts

 

 

39,236

 

 

 

36,181

 

Work in process

 

 

5,574

 

 

 

7,576

 

Raw material

 

 

14,277

 

 

 

11,766

 

Total inventories

 

$

201,536

 

 

$

163,770

 

 

 

(a)

The increase in finished goods inventory relates primarily to the Firearms segment.

15


 

(9) Accrued Expenses and Deferred Revenue:

The following table sets forth other accrued expenses as of January 31, 2020 and April 30, 2019 (in thousands):

 

 

January 31, 2020

 

 

April 30, 2019

 

Deferred revenue

$

7,103

 

 

$

12,213

 

Accrued rebates and promotions

 

6,106

 

 

 

4,877

 

Accrued taxes other than income

 

5,727

 

 

 

6,078

 

Accrued employee benefits

 

5,672

 

 

 

5,241

 

Accrued professional fees

 

4,018

 

 

 

2,649

 

Right-of-use lease liabilities

 

2,731

 

 

 

Accrued distributor incentives

 

2,673

 

 

 

1,895

 

Accrued commissions

 

1,189

 

 

 

1,004

 

Interest payable

 

498

 

 

 

737

 

Current portion of capital lease obligation

 

971

 

 

 

681

 

Accrued other

 

6,443

 

 

 

3,947

 

Total accrued expenses and deferred revenue

$

43,131

 

 

$

39,322

 

 

(10) Stockholders’ Equity:

Earnings per Share

The following table provides a reconciliation of the net income/(loss) amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three and nine months ended January 31, 2020 and 2019 (in thousands, except per share data):

 

 

For the Three Months Ended January 31,

 

 

2020

 

 

2019

 

 

Net

 

 

 

 

 

 

Per Share

 

 

Net

 

 

 

 

 

 

Per Share

 

 

Income

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Shares

 

 

Amount

 

Basic earnings

$

 

5,731

 

 

 

55,064

 

 

$

 

0.10

 

 

$

 

(5,725

)

 

 

54,544

 

 

$

 

(0.10

)

Effect of dilutive stock awards

 

 

 

 

680

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings

$

 

5,731

 

 

 

55,744

 

 

$

 

0.10

 

 

$

 

(5,725

)

 

 

54,544

 

 

$

 

(0.10

)

 

 

For the Nine Months Ended January 31,

 

 

2020

 

 

2019

 

 

Net

 

 

 

 

 

 

Per Share

 

 

Net

 

 

 

 

 

 

Per Share

 

 

Income

 

 

Shares

 

 

Amount

 

 

Income

 

 

Shares

 

 

Amount

 

Basic earnings

$

 

4,916

 

 

 

54,919

 

 

$

 

0.09

 

 

$

 

8,586

 

 

 

54,444

 

 

$

 

0.16

 

Effect of dilutive stock awards

 

 

 

722

 

 

 

 

 

 

 

 

 

688

 

 

 

 

Diluted earnings

$

 

4,916

 

 

 

55,641

 

 

$

 

0.09

 

 

$

 

8,586

 

 

 

55,132

 

 

$

 

0.16

 

 

 

For the three months ended January 31, 2020, we excluded options to purchase 20,664 shares of common stock from the computation of diluted earnings per share because the effect would be antidilutive. All of our outstanding stock options and restricted stock units, or RSUs, were included in the computation of diluted earnings per share for the three months ended January 31, 2019. We included all of our outstanding stock options and RSUs in the computation of diluted earnings per share for the nine months ended January 31, 2020 and 2019.

Incentive Stock and Employee Stock Purchase Plans

We have two incentive stock plans: the 2004 Incentive Stock Plan and the 2013 Incentive Stock Plan. New grants under the 2004 Incentive Stock Plan have not been made since the approval of the 2013 Incentive Stock Plan at our September 23, 2013 annual meeting of stockholders. All new grants covering all participants are issued under the 2013 Incentive Stock Plan. Except in specific circumstances, grants vest over a period of three or four years and stock options are exercisable for a period of 10 years from the date of grant. The plan also permits the grant of awards to non-employees, which our board of directors has authorized in the past.

16


 

The number of shares and weighted average exercise prices of stock options for the nine months ended January 31, 2020 and 2019 were as follows:

 

 

 

For the Nine Months Ended January 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

 

 

Shares

 

 

Exercise Price

 

 

Shares

 

 

Exercise Price

 

Options outstanding, beginning of year

 

 

267,761

 

 

$

6.76

 

 

 

316,160

 

 

$

6.69

 

Exercised during the period

 

 

(15,000

)

 

 

5.79

 

 

 

(32,899

)

 

 

6.52

 

Canceled/forfeited during period

 

 

(160,667

)

 

 

8.89

 

 

 

 

 

Options outstanding, end of period

 

 

92,094

 

 

$

3.22

 

 

 

283,261

 

 

$

6.71

 

Weighted average remaining contractual life

 

0.45 years

 

 

 

 

 

 

2.49 years

 

 

 

 

 

Options exercisable, end of period

 

 

92,094

 

 

$

3.22

 

 

 

283,261

 

 

$

6.71

 

Weighted average remaining contractual life

 

0.45 years

 

 

 

 

 

 

2.49 years

 

 

 

 

 

 

The aggregate intrinsic value of outstanding and exercisable stock options as of January 31, 2020 and 2019 was $571,000 and $1.5 million, respectively. There were no stock options exercised during the three months ended January 31, 2020 and 2019. The aggregate intrinsic value of the stock options exercised in the nine months ended January 31, 2020 and 2019 was $100,000 and $230,000, respectively. At January 31, 2020, there was no unrecognized compensation expense relating to outstanding stock options.

We have an Employee Stock Purchase Plan, or ESPP, in which each participant is granted an option to purchase our common stock on each subsequent exercise date during the offering period (as such terms are defined in the ESPP) in accordance with the terms of the ESPP.

The total stock-based compensation expense, including stock options, purchases under our ESPP, RSUs, and performance-based RSUs, or PSUs, was $1.4 million and $6.1 million for the nine months ended January 31, 2020 and 2019, respectively. Stock-based compensation expense is included in cost of sales, sales and marketing, research and development, and general and administrative expenses.

We grant service-based RSUs to employees and directors. The awards are made at no cost to the recipient. An RSU represents the right to receive one share of our common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees vest over a period of four years with one-fourth of the units vesting on each anniversary of the grant date. We amortize the aggregate fair value of our RSU grants to compensation expense over the vesting period.

We grant PSUs to our executive officers and certain management employees who are not executive officers. The PSUs vest, and the fair value of such PSUs will be recognized, over the corresponding three-year performance period.

During the nine months ended January 31, 2020, we granted an aggregate of 255,911 service-based RSUs, including 140,271 RSUs to non-executive officer employees and 115,640 RSUs to our directors. Compensation expense related to grants of RSUs and PSUs was $789,000 for the nine months ended January 31, 2020. During the nine months ended January 31, 2020, we cancelled 210,300 PSUs as a result of the service condition not being met, 156,725 PSUs as a result of the failure to satisfy the performance metric, and 236,319 service-based RSUs as a result of the service condition not being met. In connection with the vesting of RSUs, during the nine months ended January 31, 2020, we delivered common stock to our employees and directors, including our executive officers, with a total market value of $2.2 million.

During the nine months ended January 31, 2019, we granted an aggregate of 192,085 service-based RSUs, including 142,576 RSUs to non-executive officer employees and 49,509 RSUs to our directors. Compensation expense related to grants of RSUs and PSUs was $5.8 million for the nine months ended January 31, 2019. During the nine months ended January 31, 2019, we cancelled 112,000 PSUs as a result of the failure to satisfy the performance metric and 25,453 service-based RSUs as a result of the failure to satisfy the service condition. In connection with the vesting of RSUs, during the nine months ended January 31, 2019, we delivered common stock to our employees and directors, including our executive officers, with a total market value of $2.4 million.

17


 

A summary of activity for unvested RSUs and PSUs for the nine months ended January 31, 2020 and 2019 is as follows:

 

 

 

For the Nine Months Ended January 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

Total # of

 

 

Average

 

 

Total # of

 

 

Average

 

 

 

Restricted

 

 

Grant Date

 

 

Restricted

 

 

Grant Date

 

 

 

Stock Units

 

 

Fair Value

 

 

Stock Units

 

 

Fair Value

 

RSUs and PSUs outstanding, beginning of period

 

 

1,631,631

 

 

$

15.44

 

 

 

1,442,316

 

 

$

17.80

 

Awarded

 

 

255,911

 

 

 

7.55

 

 

 

192,085

 

 

 

12.61

 

Vested

 

 

(249,408

)

 

 

17.53

 

 

 

(195,808

)

 

 

19.54

 

Forfeited

 

 

(603,344

)

 

 

15.40

 

 

 

(137,453

)

 

 

16.05

 

RSUs and PSUs outstanding, end of period

 

 

1,034,790

 

 

$

13.01

 

 

 

1,301,140

 

 

$

16.99

 

 

As of January 31, 2020, there was $3.1 million of unrecognized compensation expense related to unvested RSUs and PSUs. This expense is expected to be recognized over a weighted average remaining contractual term of 1.3 years.

(11) Commitments and Contingencies:

Litigation

In January 2018, Gemini Technologies, Incorporated, or Gemini, commenced an action against us in the U.S. District Court for the District of Idaho, or the District Court.  The complaint alleges, among other things, that the defendants breached the earn-out and other provisions of the Asset Purchase Agreement and ancillary agreements between the parties in connection with our acquisition of the Gemtech business from Gemini.  The complaint seeks a declaratory judgment interpreting various terms of the Asset Purchase Agreement and damages in the sum of $18.6 million. In May 2018, the District Court dismissed the complaint on the grounds of forum non conveniens. In June 2018, Gemini appealed the decision dismissing its complaint to the U.S. Court of Appeals for the Ninth Circuit. On July 24, 2019, the Ninth Circuit reversed the dismissal, and remanded the case to the District Court to perform a traditional forum non conveniens analysis. On September 6, 2019, the parties stipulated that they do not contest that the venue is proper in the District of Idaho. On November 4, 2019, we filed an answer to plaintiff’s complaint and a counterclaim against Gemini and its stockholders at the time of the signing of the Asset Purchase Agreement. We believe the claims asserted in the complaint have no merit, and we intend to aggressively defend this action.    

We are a defendant in nine product liability cases and are aware of five other product liability claims, primarily alleging defective product design, defective manufacturing, or failure to provide adequate warnings. In addition, we are a co-defendant in a case filed on August 27, 1999 by the city of Gary, Indiana against numerous firearm manufacturers, distributors, and dealers seeking to recover monetary damages, as well as injunctive relief, allegedly arising out of the misuse of firearms by third parties. In January 2018, the trial court granted defendants’ Motion for Judgment on the Pleadings, dismissing the case in its entirety. In February 2018, plaintiffs appealed the dismissal to the Indiana Court of Appeals. On May 23, 2019, the Indiana Court of Appeals issued a decision, which affirmed in part and reversed in part and remanded for further proceedings, the trial court’s dismissal of the City’s complaint. On July 8, 2019, defendants filed a Petition to Transfer jurisdiction to the Indiana Supreme Court.  Briefing was completed in the Indiana Supreme Court on August 5, 2019. On November 26, 2019, the Indiana Supreme Court denied our petition to transfer. The case will now return to the trial court.

In May 2018, we were named in an action related to the Parkland, Florida shooting, filed in the Circuit Court, Broward County, Florida, seeking a declaratory judgment that a Florida statute that provides firearm manufacturers and dealers immunity from liability when their legally manufactured and lawfully sold firearms are later used in criminal acts only applies to civil actions commenced by governmental agencies not private litigants. In August 2018, we moved to dismiss the complaint on the grounds that it seeks an impermissible advisory opinion. On December 6, 2018, the court granted defendants’ motion to dismiss without prejudice and granted plaintiffs leave to amend their complaint. On December 10, 2018, plaintiffs filed a Second Amended Complaint for Declaratory Relief. On December 13, 2018, defendants filed a Motion to Dismiss Plaintiffs’ Second Amended Complaint. On November 21, 2019, the court granted defendants’ motion to dismiss plaintiffs’ second amended complaint, with prejudice.

 

18


 

In August 2019, Primus Group, LLC filed an action in the U.S. District Court for the Southern District of Ohio Eastern Division against us and other firearms manufacturers, alleging Racketeer Influenced Corrupt Organizations Act (RICO) violations, racketeering enterprise, and intentional misrepresentation.  Plaintiff, which operates as an “entertainment venue” in Columbus, Ohio, purports to bring this action on behalf of “all persons entitled to freely attend schools, shopping locations, churches, entertainment venues, and workplaces in the United States without the intrusion of individuals armed with assault weapons.”  In addition to compensatory and punitive damages, plaintiff seeks preliminary and permanent injunctive relief enjoining the distribution and sale of “assault weapons.”   On August 20, 2019, the court denied without prejudice plaintiff’s Motion for Temporary Restraining Order. On September 3, 2019, defendants moved to dismiss plaintiff’s complaint. On September 16, 2019, plaintiff filed an amended complaint, adding claims of public nuisance, negligent design, and failure to warn.  On October 9, 2019, the U.S. District Court granted defendants’ motion, dismissing the case in its entirety. On October 11, 2019, plaintiff filed a notice of appeal with the U.S. Court of Appeals for the Sixth Circuit. On November 1, 2019, the Sixth Circuit dismissed plaintiff’s appeal for failure to pay the required fee. On November 4, 2019, plaintiff-appellant filed, and the Sixth Circuit granted, a motion to reinstate the case. Appellant’s brief is due on March 13, 2020. Our response is due by April 13, 2020.

 

We are a defendant in a putative class proceeding before the Ontario Superior Court of Justice in Toronto, Canada. The action was filed on December 16, 2019.  The action claims CAD$50 million in aggregate general damages, CAD$100 million in aggregate punitive damages, special damages in an unspecified amount, together with interest and legal costs.  The named plaintiffs are two victims of a shooting that took place in Toronto on July 22, 2018, and their family members. One victim was shot and injured during the shooting. The other suffered unspecified injuries while fleeing the shooting.  The plaintiffs are seeking to certify a claim on behalf of classes that include all persons who were killed or injured in the shooting and their immediate family members.  The plaintiffs allege negligent design and public nuisance. The case has not been certified as a class action.  We intend to vigorously oppose the proceedings.

We believe that the various allegations as described above are unfounded, and, in addition, that any incident and any results from them or any injuries were due to negligence or misuse of the firearm by the claimant or a third party.

 

On July 31, 2019, our competitor, Sturm, Ruger & Co., Inc., filed a complaint and motion for preliminary injunction against us in the U.S. District Court, District of New Hampshire, seeking injunctive relief and damages.  Plaintiff alleges trade dress infringement, involving our Thompson/Center brand T/CR22 rifle, as well as violation of the New Hampshire Consumer Protection Act. A hearing on plaintiff’s motion for preliminary injunction was held in November 2019. On December 2, 2019, plaintiff withdrew its motion for preliminary injunction.      

 

John Pidcock, as trustee of the ASPC Creditor Trust (appointed under the plan of reorganization of AcuSport Corp., or AcuSport, as debtor in possession under chapter 11 of the U.S. Bankruptcy Code), is the plaintiff in two separate actions against us in the U.S. Bankruptcy Court for the Southern District of Ohio. The first seeks recovery of alleged preferential transfers received by us from AcuSport in the aggregate amount of $4.2 million. The second seeks turnover of goods allegedly owed to AcuSport by us under one or more of our promotional programs in the amount of $1.5 million. We have filed answers to both complaints denying all material allegations and asserting affirmative defenses. We believe we have strong defenses to these actions and intend to continue to vigorously defend them.

 

We believe that the various allegations as described above are unfounded.

In addition, from time to time, we are involved in lawsuits, claims, investigations, and proceedings, including commercial, environmental, and employment matters, which arise in the ordinary course of business.

The relief sought in individual cases primarily includes compensatory and, sometimes, punitive damages. Certain of the cases and claims seek unspecified compensatory or punitive damages. In others, compensatory damages sought may range from less than $75,000 to approximately $18.6 million. In our experience, initial demands do not generally bear a reasonable relationship to the facts and circumstances of a particular matter. We believe that our accruals for product liability cases and claims are a reasonable quantitative measure of the cost to us of product liability cases and claims.

We are vigorously defending ourselves in the lawsuits to which we are subject. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive, time consuming, and diverts the time and attention of our management.

We monitor the status of known claims and the related product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. After consultation with litigation counsel and a review of the merit of each claim, we have concluded that we are unable to reasonably estimate the probability or the estimated range of reasonably possible losses related to material adverse judgments related to such claims and, therefore, we have not accrued for any such judgments. In the future, should we determine that a loss (or an additional loss in excess of our accrual) is at least reasonably possible and material, we would then disclose an estimate of the possible loss or range of loss, if such estimate could be made, or disclose that an estimate could not be made. We believe that we have provided adequate accruals for defense costs.

19


 

We have recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amount due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets.

At this time, an estimated range of reasonably possible additional losses relating to unfavorable outcomes cannot be made.

(12) Segment Reporting:

We report our results of operations in two segments: (1) Firearms (which includes Firearms and Manufacturing Services divisions) and (2) Outdoor Products & Accessories. Our two segments are defined based on the reporting and review process used by the chief operating decision maker, our co-Chief Executive Officers. The Firearms segment has been determined to be a single operating segment and reporting segment based on our reliance on production metrics, such as gross margin per unit produced, units produced per day, incoming orders per day, and revenue produced by trade channel, all of which are particular to the Firearms segment. The Outdoor Products & Accessories segment is evaluated by a measurement of incoming orders per day and sales and gross margin by customer and brand.

The Firearms segment includes our firearms, services, and other components, which we manufacture or provide at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut, and our firearm products, which we develop, assemble, and market in our Springfield, Massachusetts facility. The Outdoor Products & Accessories segment includes our accessories products, which we develop, source, market, and distribute at our facilities in Columbia, Missouri, and our electro-optics products, which we develop, market, and assemble in our Wilsonville, Oregon facility.  We report operating costs based on the activities performed within each segment.

Segment assets are those directly used in or clearly allocable to a reportable segment’s operations. Assets by business segment are presented in the following table as of January 31, 2020 and April 30, 2019 (in thousands):

 

 

 

As of January 31, 2020

 

 

As of April 30, 2019

 

 

 

Firearms

 

 

Outdoor

Products &

Accessories

 

 

Total

 

 

Firearms

 

 

Outdoor

Products &

Accessories

 

 

Total

 

Total assets

 

$

463,825

 

 

$

344,322

 

 

$

808,147

 

 

$

389,719

 

 

$

377,070

 

 

$

766,789

 

Property, plant, and equipment, net

 

 

153,532

 

 

 

10,809

 

 

 

164,341

 

 

 

170,549

 

 

 

12,719

 

 

 

183,268

 

Intangibles, net

 

 

5,039

 

 

 

73,307

 

 

 

78,346

 

 

 

4,661

 

 

 

87,179

 

 

 

91,840

 

Goodwill

 

 

19,024

 

 

 

163,243

 

 

 

182,267

 

 

 

19,024

 

 

 

163,245

 

 

 

182,269

 

 

 

Results by business segment are presented in the following tables for the three months ended January 31, 2020 and 2019 (in thousands):

 

 

 

For the Three Months Ended January 31, 2020 (a)

 

 

 

Firearms

 

 

Outdoor

Products &

Accessories

 

 

Corporate

 

 

Intersegment

Eliminations

 

 

Total

 

Revenue from external customers

 

$

126,509

 

 

$

40,186

 

 

$

 

 

$

 

 

$

166,695

 

Intersegment revenue

 

 

907

 

 

 

3,084

 

 

 

 

 

 

(3,991

)

 

 

 

Total gross revenue

 

 

127,416

 

 

 

43,270

 

 

 

 

 

 

(3,991

)

 

 

166,695

 

Cost of sales

 

 

91,854

 

 

 

24,751

 

 

 

 

 

 

(5,113

)

 

 

111,492

 

Gross margin

 

 

35,562

 

 

 

18,519

 

 

 

 

 

 

1,122

 

 

 

55,203

 

Operating income/(loss)

 

 

10,128

 

 

 

(1,111

)

 

 

(7,727

)

 

 

9,617

 

 

 

10,907

 

Income tax expense/(benefit)

 

 

5,722

 

 

 

816

 

 

 

(4,265

)

 

 

 

 

 

2,273

 

20


 

 

 

 

For the Three Months Ended January 31, 2019 (a)

 

 

 

Firearms

 

 

Outdoor

Products &

Accessories

 

 

Corporate

 

 

Intersegment

Eliminations

 

 

Total

 

Revenue from external customers

 

$

123,045

 

 

$

38,963

 

 

$

 

 

$

 

 

$

162,008

 

Intersegment revenue

 

 

578

 

 

 

2,948

 

 

 

 

 

 

(3,526

)

 

 

 

Total gross revenue

 

 

123,623

 

 

 

41,911

 

 

 

 

 

 

(3,526

)

 

 

162,008

 

Cost of sales

 

 

89,262

 

 

 

22,564

 

 

 

 

 

 

(3,877

)

 

 

107,949

 

Gross margin

 

 

34,361

 

 

 

19,347

 

 

 

 

 

 

351

 

 

 

54,059

 

Operating income/(loss)

 

 

9,792

 

 

 

(13,529

)

 

 

(11,427

)

 

 

13,131

 

 

 

(2,033

)

Income tax expense/(benefit)

 

 

2,461

 

 

 

(459

)

 

 

(811

)

 

 

 

 

 

1,191

 

 

Results by business segment are presented in the following tables for the nine months ended January 31, 2020 and 2018 (in thousands):

 

 

 

For the Nine Months Ended January 31, 2020 (a)

 

 

 

Firearms

 

 

Outdoor

Products &

Accessories

 

 

Corporate

 

 

Intersegment

Eliminations

 

 

Total

 

Revenue from external customers

 

$

333,952

 

 

$

110,801

 

 

$

 

 

$

 

 

$

444,753

 

Intersegment revenue

 

 

2,623

 

 

 

13,495

 

 

 

 

 

 

(16,118

)

 

 

 

Total gross revenue

 

 

336,575

 

 

 

124,296

 

 

 

 

 

 

(16,118

)

 

 

444,753

 

Cost of sales

 

 

233,494

 

 

 

73,119

 

 

 

 

 

 

(15,223

)

 

 

291,390

 

Gross margin

 

 

103,081

 

 

 

51,177

 

 

 

 

 

 

(895

)

 

 

153,363

 

Operating income/(loss)

 

 

24,538

 

 

 

(9,535

)

 

 

(29,671

)

 

 

31,601

 

 

 

16,933

 

Income tax expense/(benefit)

 

 

13,885

 

 

 

947

 

 

 

(11,293

)

 

 

 

 

 

3,539

 

 

 

 

For the Nine Months Ended January 31, 2019 (a)

 

 

 

Firearms

 

 

Outdoor

Products &

Accessories

 

 

Corporate

 

 

Intersegment

Eliminations

 

 

Total

 

Revenue from external customers

 

$

338,513

 

 

$

124,031

 

 

$

 

 

$

 

 

$

462,544

 

Intersegment revenue

 

 

2,125

 

 

 

11,087

 

 

 

 

 

 

(13,212

)

 

 

 

Total gross revenue

 

 

340,638

 

 

 

135,118

 

 

 

 

 

 

(13,212

)

 

 

462,544

 

Cost of sales

 

 

239,639

 

 

 

73,474

 

 

 

 

 

 

(13,436

)

 

 

299,677

 

Gross margin

 

 

100,999

 

 

 

61,644

 

 

 

 

 

 

224

 

 

 

162,867

 

Operating income/(loss)

 

 

34,255

 

 

 

(15,550

)

 

 

(33,168

)

 

 

37,232

 

 

 

22,769

 

Income tax expense/(benefit)

 

 

9,295

 

 

 

(466

)

 

 

(1,430

)

 

 

 

 

 

7,399

 

 

(a)

We allocate all of corporate overhead expenses except for interest and income taxes, such as general and administrative expenses and other corporate-level expenses, to both our Firearms and Outdoor Products & Accessories segments.

 

 

21


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019 and our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q. This section sets forth key objectives and performance indicators used by us as well as key industry data tracked by us.

We report our results of operations in two segments: (1) Firearms and (2) Outdoor Products & Accessories.

Third Quarter Fiscal 2020 Highlights

Our operating results for the three months ended January 31, 2020 included the following:

 

On January 14, 2020, our Board of Directors named Mark P. Smith and Brian D. Murphy as co-Presidents and co-Chief Executive Officers of our company. Mr. Smith and Mr. Murphy succeeded P. James Debney, who separated as President and Chief Executive Officer and as a director of our company. The separation of Mr. Debney resulted in a $3.8 million decrease in general and administrative expenses as compared to the comparable quarter last year because of the reversal of compensation related costs.

 

Consolidated net sales were $166.7 million, an increase of $4.7 million, or 2.9%, from the comparable quarter last year.

 

Firearms segment gross sales were $127.4 million, which included $907,000 of inter-segment revenue, an increase of $3.8 million, or 3.1%, over the comparable quarter last year, primarily because of increased handgun sales due to the shipment of a new handgun and a change in the timing of our federal excise tax obligation that resulted in an increase in revenue and a corresponding increase in cost of sales.  This change was a direct result of the opening of our distribution center in June 2019 and resulted from the Tax and Trade Bureau denying our petition and requiring us to assess federal excise tax on the first transfer of a firearm.  Starting in June 2019, we began transferring all completed firearms to our new distribution center and became required to assess federal excise tax at that point.  Previously, we assessed federal excise tax at the point of sale to our third-party customers, allowing us to reduce the invoice value of our firearms by the federal excise tax assessed. This tax is now a cost of inventory at the distribution center and results in sales to our customers and the related cost of sales both being increased by the tax amount. This change does not impact gross profit dollars, but it reduces gross margin percentage.  The impact during the three months ended January 31, 2020 was a $10.1 million increase in sales and cost of sales and a decrease in gross margin of 240 basis points.

 

Outdoor Products & Accessories segment gross sales were $43.3 million, which included $3.1 million of inter-segment revenue, an increase of $1.4 million, or 3.2%, over the comparable quarter last year.

 

Consolidated gross margin was 33.1%, a decrease of 30 basis points from the comparable quarter last year. Excluding the impact of the change in federal excise tax treatment, gross margin would have been 35.3%, or an increase of 190 basis points over the comparable quarter last year.  

 

Consolidated net income was $5.7 million, or $0.10 per diluted share, compared with a net loss of $5.7 million, or ($0.10) per diluted share for the comparable quarter last year. Results for the comparable quarter last year included a $10.4 million non-cash impairment of goodwill in our Outdoor Products & Accessories segment. This non-cash impairment charge had a $0.19 negative impact on basic and fully diluted earnings per share for the three months ended January 31, 2019.

 

Our operating results for the nine months ended January 31, 2020 included the following:

 

Consolidated net sales were $444.8 million, a decrease of $17.8 million, or 3.8%, from the prior year comparable period.

 

Firearms segment gross sales were $336.6 million, which included $2.6 million of inter-segment revenue, a decrease of $4.1 million, or 1.2%, from the prior year comparable period, primarily because of the fulfillment of consumer demand from channel inventory for our modern sporting rifles and lower promotional activity in the current year for bolt action rifles, partially offset by a change in the timing of our federal excise tax obligation as described above and increased handgun sales because of the shipment of a new handgun. The change in federal excise tax treatment had a $20.8 million favorable impact on Firearms segment revenue and a decrease in gross margin of 200 basis points for the nine months ended January 31, 2020 compared with the prior year comparable period.

22


 

 

Outdoor Products & Accessories segment gross sales were $124.3 million, which included $13.5 million of inter-segment revenue, a decrease of $10.8 million, or 8.0%, from the prior year comparable period. The decrease in sales was primarily because of a reduction in shipments to one large retailer in our shooting and camping accessory product categories combined with a change in the timing of bulk orders for another retailer. This was partially offset by sales growth in our cutlery product category.

 

Consolidated gross margin was 34.5%, a decrease of 70 basis points from the prior year comparable period. Excluding the impact of the change in federal excise tax, gross margin would have been 36.2%, or an increase of 100 basis points over the prior year comparable period.

 

Consolidated net income was $4.9 million, or $0.09 per diluted share, compared with net income of $8.6 million, or $0.16 per diluted share, for the prior year comparable period. The non-cash impairment charge described above had an $0.18 negative impact on diluted earnings per share for the nine months ended January 31, 2019.

 

On November 14, 2019, we announced a plan to spin-off our outdoor products and accessories business, pending final approval, as a tax-free dividend to our stockholders.  We expect the spin-off to be completed in the second half of calendar 2020. The spin-off will create two independent publicly traded companies: Smith & Wesson Brands, Inc. (which would encompass our firearm business) and American Outdoor Brands, Inc. (which would encompass our outdoor products and accessories business). The primary purpose of the spin-off is to enable the management team of each company to focus on its specific strategies, including (1) structuring its business to take advantage of growth opportunities in its specific markets; (2) tailoring its business operation and financial model to its specific long-term strategies; and (3) aligning its external financial resources, such as stock, access to markets, credit, and insurance factors, with its particular type of business. In connection with the proposed spin-off, we expect to incur restructuring charges of approximately $9.0 million to $12.0 million relating to legal, regulatory, and financial services, reorganization and restructuring costs, and start-up costs for the new company. Thus far, we have incurred $1.2 million of restructuring charges relating to the spin-off.

 

Results of Operations

Consolidated Net Sales and Gross Profit – For the Three Months Ended January 31, 2020

The following table sets forth certain information regarding consolidated net sales and gross profit for the three months ended January 31, 2020 and 2019 (dollars in thousands): 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Net sales

$

166,695

 

 

$

162,008

 

 

$

4,687

 

 

 

2.9

%

Cost of sales

 

111,492

 

 

 

107,949

 

 

 

3,543

 

 

 

3.3

%

Gross profit

$

55,203

 

 

$

54,059

 

 

$

1,144

 

 

 

2.1

%

% of net sales (gross margin)

 

33.1

%

 

 

33.4

%

 

 

 

 

 

 

 

 

 

Consolidated net sales increased $4.7 million, or 2.9%, primarily because of a change in federal excise tax treatment that resulted in a $10.1 million increase in firearm sales. In our Firearms segment, revenue for handguns increased as a result of the introduction of a new concealed carry handgun and, in our Outdoor Products & Accessories segment, an increase in shooting and hunting accessory product sales was the result of increased orders from several large national retailers. These increases were partially offset by lower sales of modern sporting rifles, hunting rifles, and camping accessory product sales.

23


 

Consolidated gross margin declined 30 basis points from the comparable quarter last year. Although gross margin dollars were not impacted as a result of the change in federal excise tax treatment described above, the gross margin percentage was negatively impacted by 220 basis points. Excluding that impact, consolidated gross margins increased by 190 basis points over the comparable quarter last year, primarily because of shipping costs that were included in cost of sales in the comparable quarter last year are now included in operating expenses because of the start-up of our new distribution center, favorable manufacturing fixed cost absorption, lower manufacturing spending, and favorable inventory valuation adjustments in our Firearms segment. The favorable impacts to gross margin were partially offset by increased promotional product discounts in Firearms, lower production of laser sights that resulted in the corresponding unfavorable manufacturing fixed-cost absorption, an increase in inventory reserves for slow moving product in our Outdoor Products & Accessories segment, and higher tariff costs on imported goods in the Outdoor Products & Accessories segment.

Firearms Segment Revenue and Gross Profit – For the Three Months Ended January 31, 2020

The following tables set forth certain information regarding Firearms revenue and gross profit for the three months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Handguns

$

94,251

 

 

$

84,151

 

 

$

10,100

 

 

 

12.0

%

Long Guns

 

24,656

 

 

 

30,216

 

 

 

(5,560

)

 

 

-18.4

%

Other Products & Services

 

8,509

 

 

 

9,256

 

 

 

(747

)

 

 

-8.1

%

Total Firearms Revenue

$

127,416

 

 

$

123,623

 

 

$

3,793

 

 

 

3.1

%

Cost of sales

 

91,867

 

 

 

89,262

 

 

 

2,605

 

 

 

2.9

%

Gross profit

$

35,549

 

 

$

34,361

 

 

$

1,188

 

 

 

3.5

%

% of net sales (gross margin)

 

27.9

%

 

 

27.8

%

 

 

 

 

 

 

 

 

 

The following table sets forth certain information regarding firearm units shipped by trade channel for the three months ended January 31, 2020 and 2019 (units in thousands):

 

Total Units Shipped

2020

 

 

2019

 

 

# Change

 

 

% Change

 

Handguns

 

310

 

 

 

294

 

 

 

16

 

 

5.4%

 

Long Guns

 

61

 

 

 

88

 

 

 

(27)

 

 

-30.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sporting Goods Channel Units Shipped

2020

 

 

2019

 

 

# Change

 

 

% Change

 

Handguns

 

289

 

 

 

276

 

 

 

13

 

 

4.7%

 

Long Guns

 

58

 

 

 

85

 

 

 

(27)

 

 

-31.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional Channel Units Shipped

2020

 

 

2019

 

 

# Change

 

 

% Change

 

Handguns

 

21

 

 

 

18

 

 

 

3

 

 

16.7%

 

Long Guns

 

3

 

 

 

3

 

 

 

0

 

 

0.0%

 

 

Revenue for our handguns increased $10.1 million, or 12.0%, over the comparable quarter last year. Increases in our revenue included the above described change in federal excise tax treatment, which had a $7.8 million favorable impact on handgun revenue, and increased revenue due to the shipment of a new concealed carry handgun into our sales channel. Unit shipments into the sporting goods consumer channel increased 4.7% over the comparable quarter last year primarily because of increased shipment of new products and increased consumer firearm demand, as indicated by a 13.9% increase over the comparable quarter last year in total adjusted handgun background checks as reported to the National Instant Criminal Background Check Systems, or NICS, which we believe is a proxy for overall consumer demand. We believe that our percentage increase in sales in handguns likely did not match NICS as a result of a combination of reporting changes in certain states, timing related to new product introductions, and fulfillment of consumer demand out of channel inventory, particularly by several key strategic retailers.

Revenue for our long guns decreased $5.6 million, or 18.4%, from the comparable quarter last year, in spite of a $2.3 million increase in revenue as a result of the change in federal excise tax treatment. The decrease in revenue was due to decreased sales for our M&P modern sporting rifles as a result of decreased promotional product discounts related to bundle promotions compared to the prior year as a result of a reduction in inventory by certain strategic retailers. The decrease in revenue was also due to lower bolt action rifle sales during the current quarter as a result of offering discounts on discontinued products in the prior fiscal year as well as the timing of new product introductions later in the current fiscal year that led to lower orders early in the quarter.

24


 

Other products and services revenue decreased $747,000, or 8.1%, from the comparable quarter last year, primarily because of lower sales of component parts, handcuffs, and specialty services.

New products in our Firearms segment, defined as any new SKU not shipped in the comparable quarter last year, represented 37.0% of firearm revenue for the three months ended January 31, 2020 and included a new concealed carry M&P branded polymer pistol, many new product line extensions, and promotional product bundle kits for our M&P, Performance Center, and Thompson/Center Arms branded products.

Gross margin for the three months ended January 31, 2020 for our Firearms segment increased 10 basis points over the comparable quarter last year in spite of the negative impact of the change in federal excise tax treatment. Gross margin was negatively impacted by 240 basis points as a result of the change in federal excise tax treatment, although gross margin dollars were not impacted by that change. Excluding that tax impact, gross margin for our firearms segment increased by 250 basis points over the comparable quarter last year, primarily because of a reduction in material costs due to sourcing initiatives, shipping costs that were included in cost of sales in the comparable quarter last year that are now included in operating expenses due to the start-up of our new distribution center, favorable manufacturing fixed cost absorption, and lower manufacturing spending. The favorable impacts to Firearms gross margin were partially offset by increased promotional product discounts.

Firearm inventory balances remained relatively flat during the three months ended January 31, 2020. While inventory levels, both internally and in the distribution channel, in excess of demand may negatively impact future operating results, it is difficult to forecast the potential impact of distributor inventories on future revenue and income since demand is impacted by many factors, including seasonality, new product introductions, news events, political events, and consumer preferences.

Outdoor Products & Accessories Segment Revenue and Gross Profit – For the Three Months Ended January 31, 2020

The following table sets forth certain information regarding Outdoor Products & Accessories segment revenue for the three months ended January 31, 2020 and 2019 (dollars in thousands): 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Revenue

$

43,270

 

 

$

41,911

 

 

$

1,359

 

 

 

3.2

%

Cost of sales

 

24,750

 

 

 

22,564

 

 

 

2,186

 

 

 

9.7

%

Gross profit

$

18,520

 

 

$

19,347

 

 

$

(827

)

 

 

-4.3

%

% of net sales (gross margin)

 

42.8

%

 

 

46.2

%

 

 

 

 

 

 

 

 

 

For the three months ended January 31, 2020, revenue for our Outdoor Products & Accessories segment increased $1.4 million, or 3.2%, over the comparable quarter last year. Revenue increased as a result of increased shooting, hunting, and cutlery product sales that were driven by certain large national retailers, reflecting increased demand from these customers on a more consistent basis over the comparable quarter last year in the form of higher weekly replenishment orders. This normalized order cadence also increased overall sales dollars to these customers because of the reduction of bulk orders, which are typically accompanied with discounted prices. In addition, point of sale data from our large customers in these categories indicates significant growth over the comparable quarter last year, demonstrating strong consumer demand for our products in the channel. In spite of the increases in shooting, hunting, and cutlery, reduced sales to OEM customers for our laser products, recent bankruptcies and other financial instability by certain of our customers, and a decline in sales of our branded camping accessory products due to one large retailer accelerating a strategy towards its own private label brand, resulted in a lower than anticipated increase in revenue over the prior fiscal quarter.

New products represented 12.2% of Outdoor Products & Accessories segment revenue for the three months ended January 31, 2020. Our Outdoor Products & Accessories segment has a history of introducing approximately 250 to 350 new SKUs each year, the majority of which are introduced late in our third fiscal quarter.

25


 

Gross margin for the three months ended January 31, 2020 for our Outdoor Products & Accessories segment decreased 340 basis points from the comparable quarter last year, primarily because of lower production of laser sights that resulted in corresponding unfavorable manufacturing fixed-cost absorption, an increase in inventory reserves for slow moving laser products, and higher tariff costs on imported goods, partially offset by price increases and the absence of large bulk buy orders that typically have discounted prices.

Inventory in our Outdoor Products & Accessories segment increased $800,000 during the three months ended January 31, 2020. Items impacting our inventory included an increase in import tariffs, the introduction of over 250 new products during the quarter, increased sales and improved order cadence, and better management of inventory turns. With regard to concerns surrounding the coronavirus, and based on the situation as it currently stands, we believe our inventory levels will allow us to mitigate some of the impact to our business in the short term. We also believe that we will be able to obtain additional inventory to support the majority of our future business needs as nearly all of our suppliers in China have returned to work and are producing products with only occasional temporary disruptions to new orders. It is possible, however, that worsening of conditions or increased fears of a pandemic could have a renewed and prolonged effect on manufacturing or employment in China, travel to and from China, or other restrictions on imports – all of which could have a longer term effect on our sales and profitability in future periods.

 

Consolidated Net Sales and Gross Profit – For the Nine Months Ended January 31, 2020

The following table sets forth certain information regarding consolidated net sales and gross profit for the nine months ended January 31, 2020 and 2019 (dollars in thousands): 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Net sales

 

444,753

 

 

$

462,544

 

 

$

(17,791

)

 

 

-3.8

%

Cost of sales

 

291,390

 

 

 

299,677

 

 

 

(8,287

)

 

 

-2.8

%

Gross profit

$

153,363

 

 

$

162,867

 

 

$

(9,504

)

 

 

-5.8

%

% of net sales (gross margin)

 

34.5

%

 

 

35.2

%

 

 

 

 

 

 

 

 

 

Consolidated net sales decreased $17.8 million, or 3.8%, from the prior year comparable period because of lower modern sporting and hunting rifle sales in our Firearms segment and lower shooting and hunting and camping accessory sales in our Outdoor Products & Accessories segment. The decreases were partially offset by increased handgun sales in our Firearms segment and cutlery product sales in our Outdoor Products & Accessories segment. As described above, our sales were favorably impacted by the change in our federal excise tax treatment, resulting in a $20.8 million increase in revenue over the prior year comparable period.

Consolidated gross margin was negatively impacted by 170 basis points as a result of the change in federal excise tax treatment described above. Excluding that treatment, consolidated gross margin increased 100 basis points over the prior year comparable period, primarily because of the change in accounting for shipping costs as described above, a reduction in material costs due to sourcing initiatives, favorable inventory valuation adjustments, and lower manufacturing spending in our Firearms segment. Unfavorable impacts included lower margin contribution from the Outdoor Products & Accessories segment and higher promotional product discounts and unfavorable manufacturing fixed-cost absorption in our Firearms segment.

Firearms Segment Revenue and Gross Profit – For the Nine Months Ended January 31, 2020

The following tables set forth certain information regarding Firearms revenue and gross profit for the nine months ended January 31, 2020 and 2019 (dollars in thousands): 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Handguns

$

247,373

 

 

$

230,968

 

 

$

16,405

 

 

 

7.1

%

Long Guns

 

63,180

 

 

 

81,969

 

 

 

(18,789

)

 

 

-22.9

%

Other Products & Services

 

26,022

 

 

 

27,701

 

 

 

(1,679

)

 

 

-6.1

%

Total Firearms Revenue

$

336,575

 

 

$

340,638

 

 

$

(4,063

)

 

 

-1.2

%

Cost of sales

 

233,507

 

 

 

239,639

 

 

 

(6,132

)

 

 

-2.6

%

Gross profit

$

103,068

 

 

$

100,999

 

 

$

2,069

 

 

 

2.0

%

% of net sales (gross margin)

 

30.6

%

 

 

29.6

%

 

 

 

 

 

 

 

 

 

26


 

The following table sets forth certain information regarding firearm units shipped by trade channel for the nine months ended January 31, 2020 and 2019 (units in thousands):

 

Total Units Shipped

2020

 

2019

 

# Change

 

% Change

Handguns

800

 

772

 

28

 

3.6%

Long Guns

189

 

249

 

(60)

 

-24.1%

 

 

 

 

 

 

 

 

Sporting Goods Channel Units Shipped

2020

 

2019

 

# Change

 

% Change

Handguns

729

 

701

 

28

 

4.0%

Long Guns

177

 

236

 

(59)

 

-25.0%

 

 

 

 

 

 

 

 

Professional Channel Units Shipped

2020

 

2019

 

# Change

 

% Change

Handguns

71

 

71

 

0

 

0.0%

Long Guns

12

 

13

 

(1)

 

-7.7%

 

Revenue for our handguns increased $16.4 million, or 7.1%, primarily as a result of the change in the federal excise tax treatment described above. Excluding this change, revenue for our handguns remained relatively flat from the prior year comparable period as a result of increased promotional activity and a shift in mix to lower priced products. Favorable impacts to our handgun revenue included shipments of a new concealed carry handgun and increased shipments of Performance Center branded products, which also improved our average selling price. Although adjusted background checks for handguns reported to NICS increased 10.6% compared with the prior year comparable period, our sporting goods channel unit sales increased only 4.0% during the same period. We believe that our percentage increase in sales in handguns likely did not match NICS because of a combination of reporting changes in certain states, timing related to new product introductions, and fulfillment of consumer demand our of inventory, particularly by a few key strategic retailers. Inventory levels within the channel decreased substantially as compared to the end of our prior fiscal year as well as compared to the prior consecutive period, which demonstrates positive response in the marketplace regarding our products, and we believe we are maintaining handgun market share.

Revenue for our long guns decreased $18.8 million, or 22.9%, from the prior year comparable period, in spite of a $4.9 million increase in revenue because of a change in when we are assessed federal excise tax, primarily because of lower shipments of our M&P branded modern sporting rifles as a result of lower promotional activity in the current year as compared with the prior year comparable period and the fulfillment of consumer demand with channel inventory. In addition, bolt action rifle sales were lower than the prior year comparable period as a result of clearing discontinued products from the channel in anticipation of new products that were introduced late in our third fiscal quarter. We believe that our percentage decrease in sales likely did not match NICS because of the same reasons described above.

Other products and services revenue decreased $1.7 million, or 6.1%, from the prior year comparable period, primarily because of lower sales of component parts and handcuffs.

New products in our Firearms segment represented 29.6% of firearm revenue for the nine months ended January 31, 2020 and included a new concealed carry M&P branded polymer pistol, many new product line extensions, and promotional products bundle kits for our M&P, Performance Center, and Thompson/Center Arms branded products.

Gross margin for the nine months ended January 31, 2020 for our Firearms segment was negatively impacted 200 basis points as a result of the change in federal excise tax treatment described above. Gross margin dollars were not impacted by that tax treatment, and excluding that treatment, gross margin for our firearms segment increased by 300 basis points over the prior year comparable period, primarily because of shipping costs that were included in cost of sales in the prior year comparable period that are now included in operating expenses due to the start-up of our new distribution center, a reduction in material costs due to sourcing initiatives, favorable inventory valuation adjustments related to the release of year end manufacturing variance accruals, which were partially offset by increased standards related to material and labor cost increases, combined with improved manufacturing fixed cost absorption, lower manufacturing spending, and price increases, all of which favorably impacted Firearms gross margin by 5.0%. These favorable impacts to Firearms gross margin were partially offset by increased promotional product discounts.

27


 

Outdoor Products & Accessories Segment Revenue and Gross Profit – For the Nine Months Ended January 31, 2020

The following table sets forth certain information regarding Outdoor Products & Accessories segment revenue for the nine months ended January 31, 2020 and 2019 (dollars in thousands): 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Revenue

$

124,296

 

 

$

135,118

 

 

$

(10,822

)

 

 

-8.0

%

Cost of sales

 

73,119

 

 

 

73,474

 

 

 

(355

)

 

 

-0.5

%

Gross profit

$

51,177

 

 

$

61,644

 

 

$

(10,467

)

 

 

-17.0

%

% of net sales (gross margin)

 

41.2

%

 

 

45.6

%

 

 

 

 

 

 

 

 

 

Revenue for our Outdoor Products & Accessories segment for the nine months ended January 31, 2020 decreased $10.8 million, or 8.0%, from the prior year comparable period. Revenue decreased primarily as a result of reduced sales to OEM customers for our laser products, recent bankruptcies and other financial instability by certain of our customers, and a decline in sales of our branded camping accessory products due to one large retailer accelerating a strategy towards their own private label brand. The negative impacts on revenue were partially offset by increased cutlery product sales to most major customers.

New products represented 10.3% of Outdoor Products & Accessories segment revenue for the nine months ended January 31, 2020.

Gross margin for the nine months ended January 31, 2020 for our Outdoor Products & Accessories segment was negatively impacted by 4.4% from the prior year comparable period primarily because of lower production of laser sights that resulted in the corresponding unfavorable manufacturing fixed-cost absorption and higher tariff costs on imported goods.

Consolidated Operating Expenses

The following table sets forth certain information regarding operating expenses for the three months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Research and development

$

3,192

 

 

$

3,297

 

 

$

(105

)

 

 

-3.2

%

Selling, marketing, and distribution

 

19,294

 

 

 

15,373

 

 

 

3,921

 

 

 

25.5

%

General and administrative

 

21,810

 

 

 

27,026

 

 

 

(5,216

)

 

 

-19.3

%

Impairment of long-lived assets

 

 

 

10,396

 

 

 

 

N/A

 

Total operating expenses

$

44,296

 

 

$

56,092

 

 

$

(11,796

)

 

 

-21.0

%

% of net sales

 

26.6

%

 

 

34.6

%

 

 

 

 

 

 

 

 

28


 

 

Research and development expenses remained relatively flat from the prior year comparable quarter. Selling, marketing, and distribution expenses increased $3.9, million partially as a result of the start-up of our new distribution center during the first quarter of fiscal 2020, which included approximately $1.1 million of shipping costs that would have been included in cost of sales in the comparable quarter last year as well as additional costs related to compensation and benefits, depreciation, property taxes, and security. In addition, increased co-op advertising expenses to strategic customers in the Firearms segment resulted in increased spending over the comparable quarter last year. This increased spending was partially offset by lower management incentive compensation costs. General and administrative expenses decreased $5.2 million because of a combination of decreased compensation related expenses in connection with the separation of our President and Chief Executive Officer, decreased costs due to the closure of our Jacksonville, Florida facility during our first fiscal quarter, and decreased bad debt expense. These increases were partially offset by increased depreciation related to our 633,000 square foot Missouri distribution center and increased expenses related to the planned spin-off of our outdoor products and accessories business, as described above. On February 26, 2020, we signed a separation agreement with our former President and Chief Executive Officer that will result in an increase to our fourth quarter general and administrative expenses by approximately $1.6 million.  

 

The following table sets forth certain information regarding operating expenses for the nine months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Research and development

$

9,410

 

 

$

9,358

 

 

$

52

 

 

 

0.6

%

Selling, marketing, and distribution

 

55,419

 

 

 

42,279

 

 

 

13,140

 

 

 

31.1

%

General and administrative

 

71,601

 

 

 

78,065

 

 

 

(6,464

)

 

 

-8.3

%

Impairment of long-lived assets

 

 

 

10,396

 

 

 

 

N/A

 

Total operating expenses

$

136,430

 

 

$

140,098

 

 

$

(3,668

)

 

 

-2.6

%

% of net sales

 

30.7

%

 

 

30.3

%

 

 

 

 

 

 

 

 

 

Research and development remained flat from the prior year comparable period. Selling, marketing, and distribution expenses increased $13.1 million partially as a result of the start-up of our new distribution center during the first quarter of fiscal 2020, which included approximately $3.3 million of costs that would have been included in cost of sales in the prior year comparable period as well as additional costs related to compensation and benefits, depreciation, property taxes, and security. In addition, increased co-op advertising expenses in the Firearms segment related to strategic customers, additional targeted customer promotions in our Outdoor Products & Accessories segment, and increases related to the development of our eCommerce initiative resulted in increased spending over the prior year comparable period. General and administrative expenses decreased $6.5 million primarily as a result of decreased compensation related expenses in connection with the separation of our President and Chief Executive Officer, and decreased costs due to the closure of our Jacksonville, Florida facility, partially offset by increased professional fees, increased depreciation and compensation-related expenses related to our 633,000 square foot Missouri distribution center, and increased expenses related to the planned spin-off of our outdoor products and accessories business, as described above.

Consolidated Operating Income

The following table sets forth certain information regarding operating income for the three months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Operating income

$

10,907

 

 

$

(2,033

)

 

$

12,940

 

 

 

-636.5

%

% of net sales (operating margin)

 

6.5

%

 

 

-1.3

%

 

 

 

 

 

 

 

 

 

Operating income for the three months ended January 31, 2020 was $10.9 million, an increase of $12.9 million from the comparable quarter last year, which included a non-cash goodwill impairment charge. Excluding the impact of the non-cash goodwill impairment, operating income increased $2.5 million, or 30.4%, over the comparable quarter last year, primarily because of favorable manufacturing fixed cost absorption, lower manufacturing spending, favorable inventory valuation adjustments, decreased compensation related expenses in connection with the separation of our President and Chief Executive Officer, decreased costs due to the closure of our Jacksonville, Florida facility during our first fiscal quarter, and decreased bad debt expense. These decreased expenses were partially offset by increased promotional product discounts, increased costs related to our 633,000 square foot Missouri distribution center, increased co-op advertising expenses to strategic customers, and increased expenses related to the planned spin-off of our outdoor products and accessories business, as described above.

29


 

 

 

The following table sets forth certain information regarding operating income for the nine months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Operating income

$

16,933

 

 

$

22,769

 

 

$

(5,836

)

 

 

-25.6

%

% of net sales (operating margin)

 

3.8

%

 

 

4.9

%

 

 

 

 

 

 

 

 

 

Operating income for the nine months ended January 31, 2020 was $16.9 million, a decrease of $5.8 million from the prior year comparable period, which included a non-cash goodwill impairment charge. Excluding the impact of the non-cash goodwill impairment, operating income decreased $16.2 million, or 48.9%, from the prior year comparable period, primarily because of lower sales volumes, increased promotional product discounts and targeted customer promotions in our Firearms segment, increased co-op advertising expenses related to strategic customers, increased expenses related to the development of our eCommerce initiative, increased depreciation and compensation-related expenses related to our 633,000 square foot Missouri distribution center, and increased expenses related to the planned spin-off of our outdoor products and accessories business. These increased expenses were partially offset by a combination of favorable manufacturing fixed cost absorption, lower manufacturing spending, decreased compensation related expenses in connection with the separation of our President and Chief Executive Officer, and decreased costs as a result of the closure of our Jacksonville, Florida facility.

Consolidated Interest Expense

The following table sets forth certain information regarding interest expense for the three months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Interest expense

$

(2,885

)

 

$

(2,548

)

 

$

337

 

 

 

13.2

%

 

During the three months ended January 31, 2020, interest expense increased by $337,000 over the comparable quarter last year as a result of increased interest on our capital lease for our Missouri campus and additional borrowings outstanding.

 

The following table sets forth certain information regarding interest expense for the nine months ended January 31, 2020 and 2019 (dollars in thousands): 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Interest expense

$

(8,551

)

 

$

(6,822

)

 

$

1,729

 

 

 

25.3

%

 

During the nine months ended January 31, 2020, interest expense increased by $1.7 million over the prior year comparable period as a result of increased interest on our capital lease for our Missouri campus and additional borrowings outstanding.

Consolidated Income Taxes

The following table sets forth certain information regarding interest expense for the three months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Income tax expense

$

2,273

 

 

$

1,191

 

 

$

1,082

 

 

 

90.8

%

% of income from operations (effective tax rate)

 

28.4

%

 

 

-26.3

%

 

 

 

 

 

 

54.7

%

 

Income tax expense increased $1.1 million over the comparable quarter last year as a result of higher operating income for the reasons mentioned above.

 

The following table sets forth certain information regarding income tax expense for the nine months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Income tax expense

$

3,539

 

 

$

7,399

 

 

$

(3,860

)

 

 

-52.2

%

% of income from operations (effective tax rate)

 

41.9

%

 

 

46.3

%

 

 

 

 

 

 

-4.4

%

 

Income tax expense decreased $3.9 million from the prior year comparable period, as a result of lower operating income and the tax effect of stock compensation. The tax rate was higher than the expected statutory rate because of the impact of non-deductible, one-time expenses relating to the spin-off.

30


 

Consolidated Net Income/(Loss)

The following table sets forth certain information regarding consolidated net income and the related per share data for the three months ended January 31, 2020 and 2019 (dollars in thousands, except per share data):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Net income/(loss)

$

5,731

 

 

$

(5,725

)

 

$

11,456

 

 

 

-200.1

%

Net income/(loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.10

 

 

$

(0.10

)

 

$

0.20

 

 

 

-200.0

%

Diluted

$

0.10

 

 

$

(0.10

)

 

$

0.20

 

 

 

-200.0

%

 

Excluding the impact of goodwill impairment in the prior year, net income for three months ended January 31, 2020 increased $1.1 million, or 22.7%, over the comparable quarter last year primarily as a result of the reasons discussed above, as well as increased interest expense as a result of increased interest on our capital lease for our Missouri campus and additional borrowings outstanding.

 

The following table sets forth certain information regarding consolidated net income and the related per share data for the nine months ended January 31, 2020 and 2019 (dollars in thousands, except per share data):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Net income

$

4,916

 

 

$

8,586

 

 

$

(3,670

)

 

 

-42.7

%

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.09

 

 

$

0.16

 

 

$

(0.07

)

 

 

-43.8

%

Diluted

$

0.09

 

 

$

0.16

 

 

$

(0.07

)

 

 

-43.8

%

 

Excluding the impact of goodwill impairment in the prior year, net income decreased $14.1 million, or 74.1%, from the prior year comparable period, primarily as a result of the reasons discussed above, as well as increased interest on our capital lease for our Missouri campus and additional borrowings outstanding.

 

Liquidity and Capital Resources

Our principal cash requirements are to (1) finance the growth of our operations, including working capital and capital expenditures, (2) service our existing debt, and (3) fund the spin-off of our outdoor products and accessories business. Capital expenditures for material handling equipment and other capital projects to support our national logistics facility, various information technology projects, and tooling for new product offerings represent important cash needs.

The following table sets forth certain cash flow information for the nine months ended January 31, 2020 and 2019 (dollars in thousands):

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Operating activities

$

(25,041

)

 

$

20,745

 

 

$

(45,786

)

 

 

-220.7

%

Investing activities

 

(12,302

)

 

 

(26,912

)

 

 

14,610

 

 

 

-54.3

%

Financing activities

 

42,429

 

 

 

(5,223

)

 

 

47,652

 

 

 

912.3

%

Total cash flow

$

5,086

 

 

$

(11,390

)

 

$

16,476

 

 

 

-144.7

%

 

Operating Activities

On an annual basis, operating activities generally represent the principal source of our cash flow.

Cash used in operating activities was $25.0 million for the nine months ended January 31, 2020 compared with $20.7 million of cash generated for the nine months ended January 31, 2019. Cash used in operating activities for the nine months ended January 31, 2020 was negatively impacted by lower profits, an incremental $17.6 million increase in inventory over the prior year increase due to the launch of several new products late in the current fiscal quarter and the $8.2 million impact of federal excise tax included in inventory due to the launch of our new Missouri distribution center. In addition, a $13.1 million incremental reduction in payroll and incentive accruals due to the payment of higher management incentive bonuses during the period combined with lower profitability and the separation of our President and Chief Executive Officer, and a $4.3 million incremental decrease in accounts payable due to timing. Consistent with our historical seasonal inventory trends, we expect inventory in both of our segments to decline throughout our fourth fiscal quarter.

31


 

Investing Activities

Cash used in investing activities decreased $14.6 million for the nine months ended January 31, 2020 from the prior year comparable period. We recorded capital expenditures of $11.8 million for the nine months ended January 31, 2020, $14.2 million lower than the prior year comparable period due to increased spending in the prior year related to our national distribution center. We currently expect to spend between $15.0 million and $20.0 million on capital expenditures in fiscal 2020, a decrease of $13.9 million to $18.9 million, as compared with $33.9 million in capital expenditures in fiscal 2019.

Financing Activities

Cash provided by financing activities was $42.4 million for the nine months ended January 31, 2020 compared with cash used in financing activities of $5.2 million for the nine months ended January 31, 2019. Cash provided by financing activities during the nine months ended January 31, 2020 was primarily a result of $50.0 million borrowings on our credit facility to support cash needed for operations. See below regarding the repayment of our Term Loan and Senior Notes with proceeds from our Revolving Line during the three months ended January 31, 2020.

 

Capital Lease – In fiscal 2017, we announced a plan to establish a national logistics facility in Boone County, Missouri. We ultimately plan to rely on this logistics facility for substantially all of our product distribution. In fiscal 2018, we broke ground on this new 633,000 square foot facility, which was completed in November 2018 and will become fully operational over the course of the remainder of fiscal 2020. As part of the completion of the building, we entered into a lease agreement with the developer of the building for $46.2 million. The lease has an effective interest rate of approximately 5.0% and is payable in 240 monthly installments through fiscal 2039. Upon the commencement of this lease, leases were accounted for under the provisions of ASC 840-10, Leases, which requires that leases be evaluated and classified as operating or capital leases for financial reporting purposes. Based on our evaluation under ASC 840-10, we determined that the lease qualified as a capital lease because the net present value of future lease payments exceeded 90% of the fair market value of the leased building. The building is pledged to secure the amounts outstanding. During the nine months ended January 31, 2020, we paid $629,000 in principal payments relating to this capital lease. In November 2019, we announced a plan to spin off the outdoor products and accessories business of the company resulting in two independent companies: Smith & Wesson Brands, Inc. (which would encompass our firearm business) and American Outdoor Brands, Inc. (which would encompass our outdoor products and accessories business).  The lease is currently held by the corporation that will be named Smith & Wesson Brands, Inc. and is expected to remain that way after the spin-off. It is expected, however, that American Outdoor Brands, Inc. will become a sub-lessor of the facility, although negotiations on those matters have not yet been completed.

 

Credit Facilities – On June 15, 2015, we and certain of our domestic subsidiaries entered into an unsecured credit facility, or the Credit Agreement, with TD Bank, N.A. and other lenders, or the Lenders, which included a $175.0 million revolving line of credit, or the Revolving Line, and a $105.0 million term loan, or the Term Loan. The Term Loan was paid in full on November 19, 2019 with proceeds from the Revolving Line. The Revolving Line provides for availability for general corporate purposes, with borrowings to bear interest at a variable rate equal to LIBOR or prime plus an applicable margin based on our consolidated leverage ratio, at our election. On October 27, 2016, we entered into a second amendment to our Credit Agreement, or the Second Amendment, which, among other things, increased the Revolving Line to $350.0 million, increased the option to expand the credit commitment to an additional $150.0 million, and extended the maturity of the Revolving Line from June 15, 2020 to October 27, 2021. On November 22, 2019, we entered into a fifth amendment to our Credit Agreement, or the Fifth Amendment, which, among other things, provides the Lenders’ consent to the spin-off of the outdoor products and accessories business, provided that certain financial conditions are satisfied, including (x) granting the Lenders security interest in the assets of the remaining business, (y) reducing the Revolving Line to $250.0 million at the time of the spin-off, and (z) reducing the option to expand the credit agreement to $50.0 million at the time of the spin-off. Other than the changes described in the Second and Fifth Amendments, we otherwise remain subject to the terms of the Credit Agreement, as described below.

 

As of January 31, 2020, we had $200.0 million of borrowings outstanding on the Revolving Line, which bore interest at 3.92%, which is equal to the LIBOR rate plus an applicable margin.

 

We were required to obtain interest rate protection on the Term Loan covering not less than 75% of the aggregate outstanding principal balance of the Term Loan. Accordingly, on June 18, 2015, we entered into an interest rate swap agreement that covered 100% of the $105.0 million of floating rate debt. On July 6, 2015, we executed an interest rate swap pursuant to such agreement, which required us to pay interest at a defined rate of 1.56% while receiving interest at a defined variable rate equal to the one-month LIBOR rate. This swap, when combined with the applicable margin based on our consolidated leverage ratio, effectively fixed our interest rate on the Term Loan, which was subject to change based on changes in our consolidated leverage ratio. In accordance with the repayment of the Term Loan on November 19, 2019, the interest rate swap was terminated resulting in a realized gain of approximately $40,000.

32


 

2020 Senior Notes - On February 28, 2018, we issued an aggregate of $75.0 million of the 2020 Senior Notes to various institutional investors pursuant to the terms and conditions of an indenture, or the 2020 Senior Notes Indenture, and purchase agreements. The 2020 Senior Notes bore interest at a rate of 5.000% per annum payable on February 28 and August 28 of each year, beginning on August 28, 2018. We incurred $158,000 of debt issuance costs related to the issuance of the 2020 Senior Notes. On January 6, 2020, or the Redemption Date, we redeemed 100% of the principal amount of the 2020 Senior Notes, plus accrued and unpaid interest to, but not including, the Redemption Date, with proceeds from the Revolving Line. As part of the redemption, we wrote off $42,000 of debt issuance costs related to the 2020 Senior Notes.

The Credit Agreement for our credit facility contains financial covenants relating to maintaining maximum leverage and minimum debt service coverage. We were in compliance with all debt covenants as of January 31, 2020.

Our future capital requirements will depend on many factors, including net sales, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, the construction of our national logistics facility, the spin-off of our Outdoor Products & Accessories segment, and any acquisitions or other strategic investments that we may make. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.

As of January 31, 2020, we had $46.1 million in cash and cash equivalents on hand. Based upon our current working capital position, current operating plans, and expected business conditions, we believe that our existing capital resources and credit facilities will be adequate to fund our operations, including our outstanding debt and other commitments, for the next 12 months.

Other Matters

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant accounting policies are disclosed in Note 3 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019. The most significant areas involving our judgments and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019, to which there have been no material changes. Actual results could differ from our estimates.

Recent Accounting Pronouncements

The nature and impact of recent accounting pronouncements, if any, is discussed in Note 2—Basis of Presentation to our condensed consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the period ended January 31, 2020, we did not enter into or transact any forward option contracts nor did we have any forward contracts outstanding. We enter into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk associated with our variable rate debt. We may be exposed to credit and market risks, including, but not limited to, the failure of any counterparty to perform under the terms of the derivative contract or the adverse effect on the value of the financial instrument resulting from a change in interest rates.

 

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our co-Chief Executive Officers and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on this evaluation, our co-Chief Executive Officers and Chief Financial Officer concluded that, as of January 31, 2020, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

33


 

Based on this evaluation, our co-Chief Executive Officers and Chief Financial Officer have concluded that, as of January 31, 2020, our disclosure controls and procedures were effective at a reasonable assurance level in that they were reasonably designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and (ii) is accumulated and communicated to management, including our co-Chief Executive Officers and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

34


 

PART II — OTHER INFORMATION

The nature of legal proceedings against us is discussed in Note 11—Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

As of January 31, 2020, we had no authorized share repurchase programs.

 

Item 6. Exhibits

The exhibits listed on the Index to Exhibits (immediately preceding the signatures section of this Quarterly Report on Form 10-Q) are included herewith or incorporated herein by reference.

 

35


 

INDEX TO EXHIBITS

 

  10.113(b)

 

Fifth Amendment to Credit Agreement, dated as of November 22, 2019, among the Registrant, American Outdoor Brands Sales Company, and Smith & Wesson Inc., as Borrowers, the subsidiaries of the Borrowers party thereto, as the guarantors, the lenders party thereto, and TD Bank, N.A., as Administrative Agent and Swingline Lender (1)

 

 

 

  31.1

  

Rule 13a-14(a)/15d-14(a) Certification of Principal Co-Executive Officer

 

 

  31.2

  

Rule 13a-14(a)/15d-14(a) Certification of Principal Co-Executive Officer

 

 

  31.3

  

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

 

 

 

  31.4

  

Rule 13a-14(a)/15d-14(a) Certification of Principal Accounting Officer

 

 

 

  32.1

  

Section 1350 Certification of Co-Principal Executive Officer

 

 

  32.2

  

Section 1350 Certification of Co-Principal Executive Officer

 

 

 

  32.3

  

Section 1350 Certification of Principal Financial Officer

 

 

  32.4

  

Section 1350 Certification of Principal Accounting Officer

 

 

 

101.INS

 

Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

 

 

(1)

Incorporated by reference to the Registrant’s Form 8K filed with the SEC on November 26, 2019.

36


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

AMERICAN OUTDOOR BRANDS CORPORATION,

a Nevada corporation

 

 

 

Date: March 5, 2020

 

By:

 

/s/ Mark P. Smith

 

 

 

 

 

 

 

 

 

Co-President and Co-Chief Executive Officer

 

 

 

 

 

 

 

 

Date: March 5, 2020

 

By:

 

/s/ Brian D. Murphy

 

 

 

 

 

 

 

 

 

Co-President and Co-Chief Executive Officer

 

 

 

 

 

 

 

 

Date: March 5, 2020

 

By:

 

/s/ Jeffrey D. Buchanan

 

 

 

 

Jeffrey D. Buchanan

 

 

 

 

Executive Vice President,

Chief Financial Officer, Chief Administrative Officer, and Treasurer

 

Date: March 5, 2020

 

By:

 

/s/ Deana L. McPherson

 

 

 

 

Deana L. McPherson

 

 

 

 

Vice President, Chief Accounting Officer,

Corporate Controller, and Assistant Treasurer

 

 

 

37